Economic Principles Exam Preparation Guide - 11779 Verified Questions

Economic Principles

Exam Preparation Guide

Course Introduction

Economic Principles introduces students to the foundational concepts and analytical tools of economics, exploring how individuals, firms, and governments make choices in the context of scarcity. The course covers essential principles such as supply and demand, opportunity cost, market equilibrium, and the allocation of resources. Through real-world examples and case studies, students examine the roles of markets, price mechanisms, and policy interventions in shaping economic outcomes. The aim is to develop critical thinking skills and a solid understanding of both microeconomic and macroeconomic frameworks, preparing students to analyze contemporary economic issues and make informed decisions.

Recommended Textbook Principles of Macroeconomics 8th Edition by N.

Gregory Mankiw

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Chapter 1: Ten Principles of Economics

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Q1) Resources are

A)scarce for households but plentiful for economies.

B)plentiful for households but scarce for economies.

C)scarce for households and scarce for economies.

D)plentiful for households and plentiful for economies.

Answer: C

Q2) Approximately what percentage of the world's economies experience scarcity?

A)10%

B)40%

C)85%

D)100%

Answer: D

Q3) Which of the following is a decision that economists study?

A)how much people work

B)what people buy

C)how much money people save

D)All of the above are correct.

Answer: D

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Chapter 1: Ten Principles of Economics: How People Make Decisions

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Q1) The marginal benefit Kyra gets from eating a second sandwich is

A)the total benefit Kyra gets from eating two sandwiches minus the total benefit she gets from eating one sandwich.

B)the same as the total benefit she gets from eating two sandwiches.

C)less than the marginal cost of eating the second sandwich since she chose to eat the second sandwich.

D)the total benefit Kyra gets from eating three sandwiches minus the total benefit she gets from eating two sandwiches.

Answer: A

Q2) Ashley eats two bananas during a particular day.The marginal benefit she enjoys from eating the second banana

A)can be thought of as the total benefit Ashley enjoys by eating two bananas minus the total benefit she would have enjoyed by eating just the first banana.

B)determines Ashley's marginal cost of the first and second bananas.

C)does not depend on how many bananas Ashley has already eaten.

D)cannot be determined unless we know how much she paid for the bananas.

Answer: A

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Chapter 1: Ten Principles of Economics: How People Interact

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Q1) If an externality is present in a market,economic efficiency may be enhanced by A)government intervention.

B)a decrease in foreign competition.

C)fewer market participants.

D)weaker property rights.

Answer: A

Q2) If the government were to intervene and set the price of a dozen eggs above the market price,then we would expect,relative to the market outcome,

A)an increase in the number of eggs people want to buy and an increase in the number of eggs farmers want to sell.

B)an increase in the number of eggs people want to buy and a decrease in the number of eggs farmers want to sell.

C)a decrease in the number of eggs people want to buy and an increase in the number of eggs farmers want to sell.

D)a decrease in the number of eggs people want to buy and a decrease in the number of eggs farmers want to sell.

Answer: C

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Chapter 1: Ten Principles of Economics: How the Economy

As a Whole Works

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Q1) One of the 20th century's worst episodes of inflation occurred in A)the United States in the 1960s.

B)Italy in the 1950s.

C)Russia in the 1930s.

D)Germany in the 1920s.

Q2) The business cycle is measured by the A)production of goods and services.

B)number of people employed.

C)the interest rate.

D)Both a and b are correct.

Q3) In 2011,the average American earned about $48,000 while the average Nigerian earned about $1,200.Which of the following statements is likely?

A)The average American purchases more televisions than the average Nigerian.

B)The average American has better nutrition and healthcare than the average Nigerian.

C)The average American has a longer life expectancy than the average Nigerian.

D)All of the above are correct.

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Chapter 1: Ten Principles of Economics: Part A

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Q1) Economists use the term ------ to refer to a situation in which the market on its own fails to produce an efficient allocation of resources.

Q2) Refer to Scenario 1-4.What is your opportunity cost of studying economics?

Q3) Refer to Scenario 1-6.What is the company's average cost?

Q4) Give an example of government intervention that is intended to reduce an externality.

Q5) Explain how government policies that redistribute income from the rich to the poor might reduce efficiency.

Q6) Refer to Scenario 1-2.What is your opportunity cost of going to the movies?

Q7) What are the two short-run effects of increasing the quantity of nation's money?

Q8) Melinda quits her job at a bank,which pays $30,000 a year,to enroll in a two-year graduate program.Her annual school expenses are $22,000 for tuition and fees and $2,000 for books.What is her opportunity cost of attending the two-year graduate program?

Q9) Refer to Scenario 1-5.What is your opportunity cost of working?

Q10) What does the term "marginal change" mean?

Q12) What do prices reflect in a market economy? Page 7

Q11) Economists use the term ------ to refer to fluctuations in economic activity,such as employment and production.

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Chapter 1: Ten Principles of Economics: Part B

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Q1) A rational decision maker takes an action if and only if the marginal benefit exceeds the marginal cost.

A)True B)False

Q2) Communist countries worked on the premise that government officials were in the best position to allocate the economy's scarce resources.

A)True B)False

Q3) Government policies that improve equality usually increase efficiency at the same time.

A)True B)False

Q4) The business cycle refers to fluctuations in economic activity such as employment and production.

A)True B)False

Q5) Inflation is the primary determinant of a country's living standards.

A)True B)False

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Chapter 2: Thinking Like an Economist

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Q1) Studying which of the following is helpful in learning to think like an economist?

A)theory.

B)case studies.

C)examples of economics in the news.

D)all of the above.

Q2) The language of economics is

A)needlessly arcane.

B)valuable because it provides a new and useful way of learning about the world.

C)easy to learn within a day.

D)unnecessary to learn for a thorough understanding of economics.

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Chapter 2: Thinking Like an Economist: The Economist As Scientist

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Q1) When studying the effects of public policy changes,economists

A)always refrain from making assumptions.

B)sometimes make different assumptions about the short run and the long run.

C)consider only the direct effects of those policy changes and not the indirect effects.

D)consider only the short-run effects of those policy changes and not the long-run effects.

Q2) Refer to Figure 2-14.The opportunity cost of moving from point U to point R is

A)60 bushels of apples.

B)80 bushels of apples.

C)80 sweaters.

D)160 sweaters.

Q3) Home is a country that produces two goods,pears and cellular phones.Last year,Home produced 450 bushels of pears and 1050 cellular phones.This year it produced 450 bushels of pears and 2000 cellular phones.Given no other information,which of the following events could explain this change?

A)Home experienced increased unemployment.

B)Home experienced a decline in pear-producing technology.

C)Home experienced an improvement in cellular phone-making technology.

D)Home experienced a reduction in resources.

Page 11

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Chapter 2: Thinking Like an Economist: The Economist As Policy Adviser

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Q1) Normative statements are not

A)descriptive.

B)prescriptive.

C)claims about how the world should be.

D)made by economists speaking as policy advisers.

Q2) Positive statements are not

A)descriptive.

B)prescriptive.

C)claims about how the world is.

D)made by economists speaking as scientists.

Q3) Which of the following is an example of a normative - as opposed to a positivestatement?

A)The discount rate is the interest rate the Federal Reserve charges banks to borrow funds.

B)The US income tax rate increases with the amount of income earned.

C)The government should increase the tax on gasoline.

D)The US unemployment rate increased to 10 percent in 2009.

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Chapter 2: Thinking Like an Economist: Why Economists

Disagree

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Q1) President Ronald Reagan once joked that a Trivial Pursuit game designed for economists would

A)have no questions but hundreds of answers.

B)have 100 questions and 3,000 answers.

C)have 1,000 questions but no answers.

D)never produce a winner.

Q2) A survey of professional economists revealed that more than three-fourths of them agreed with fourteen economic propositions.Which of the following is not one of those propositions?

A)The United States should not restrict employers from outsourcing work to foreign countries.

B)The United States should withdraw from the North American Free Trade Agreement (NAFTA).

C)The United States should eliminate agricultural subsidies.

D)Local and state governments should eliminate subsidies to professional sports franchises.

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Q1) John Maynard Keynes referred to economics as an easy subject,

A)at which very few excel.

B)but not as easy as philosophy or the pure sciences.

C)which very few can enjoy.

D)which deals primarily with common sense.

Q2) How did the influential economist John Maynard Keynes explain his remark that though economics is an easy subject compared with the higher branches of philosophy or pure science,it is a subject at which few excel?

A)Most people who study economics are not very bright.

B)Good economists must possess a rare combination of gifts.

C)Economics is quite boring;hence,people tend to lose interest in it before mastering it.

D)Good thinkers become frustrated with economics because it does not make use of the scientific method.

Q3) According to economist John Maynard Keynes,a great economist must also be a(n)

A)mathematician.

B)historian.

C)philosopher.

D)All of the above are correct.

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Chapter 2: Thinking Like an Economist: Graphing a Brief Review

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Sample Questions

Q1) Refer to Figure 2-17.The slope of the curve between points A and B is A)-5

B)-1/5

C)1/5

D)5

Q2) When two variables have a positive correlation,

A)they tend to move in opposite directions.

B)they tend to move in the same direction.

C)one variable will move while the other remains constant.

D)the variables' values are never negative.

Q3) When two variables move in the same direction,the curve relating them is

A)upward sloping,and we say the variables are positively related.

B)upward sloping,and we say the variables are negatively related.

C)downward sloping,and we say the variables are positively related.

D)downward sloping,and we say the variables are negatively related.

Q4) In the ordered pair (5,3),3 is the A)horizontal location of the point.

B)the slope.

C)the x-coordinate.

D)the y-coordinate.

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Chapter 2: Thinking Like an Economist: Part A

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Q1) Refer to Figure 2-14.Which point(s)on the graph is(are)efficient production possibilities?

Q2) When economists are trying to explain the world,they are scientists.When they are trying to improve it,they are

Q3) Refer to Figure 2-14.The bowed outward shape of the production possibilities curve indicates that opportunity cost of apples in terms of sweaters is

Q4) Refer to Figure 2-14.Which point(s)on the graph is(are)unattainable given current resources and technology?

Q5) Most economists agree that a large federal budget deficit has what type of effect on the economy?

Q6) Refer to Figure 2-3.What do the ovals represent in the figure?

Q7) In the circular flow diagram,when Brian provides labor through the markets for factors of production to ABC Company,the flow of money he receives in exchange is called

Q8) Economists at which administrative department help enforce the nation's antitrust laws?

Q9) Refer to Figure 2-15.Consider the production possibilities frontier for an economy that produces only sofas and cars.The opportunity cost of one sofa is

Page 16

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Chapter 2: Thinking Like an Economist: Part B

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Sample Questions

Q1) In the markets for the factors of production in the circular-flow diagram,households are buyers and firms are sellers.

A)True

B)False

Q2) Refer to Figure 2-14.It is possible for this economy to produce 75 doghouses.

A)True

B)False

Q3) When economists are trying to explain the world,they are scientists,and when they are trying to help improve the world,they are policy advisers.

A)True

B)False

Q4) Points outside the production possibilities frontier represent infeasible levels of production.

A)True

B)False

Q5) A macroeconomist,rather than a microeconomist,would study the effects on a market from two firms merging.

A)True

B)False

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Chapter 3: Interdependence and the Gains From Trade

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Q1) People who provide you with goods and services

A)are acting out of generosity.

B)do so because they get something in return.

C)have chosen not to become interdependent.

D)are required to do so by the government.

Q2) When an economist points out that you and millions of other people are interdependent,he or she is referring to the fact that we all

A)rely upon the government to provide us with the basic necessities of life.

B)rely upon one another for the goods and services we consume.

C)have similar tastes and abilities.

D)are concerned about one another's well-being.

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Chapter 3: Interdependence and the Gains From Trade: A Parable for

the Modern Economy

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Q1) Refer to Figure 3-9.If the production possibilities frontiers shown are each for two days of production,then which of the following combinations of bolts and nails could Uzbekistan and Azerbaijan together not make in a given 2-day production period?

A)9 bolts and 122 nails

B)21 bolts and 98 nails

C)36 bolts and 56 nails

D)47 bolts and 18 nails

Q2) Suppose there are only two people in the world.Each person's production possibilities frontier also represents his or her consumption possibilities when

A)neither person faces trade-offs.

B)the frontiers are straight lines.

C)the frontiers are bowed out.

D)they choose not to trade with one another.

Q3) The production possibilities frontier illustrates

A)the combinations of output that an economy should produce.

B)the combinations of output that an economy should consume.

C)the combinations of output that an economy can produce.

D)All of the above are correct.

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Chapter 3: Interdependence and the Gains From Trade:

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Q1) Refer to Figure 3-23.For Bonovia,what is the opportunity cost of a pound of cheese?

A)0.8 pounds of ham

B)1.25 pounds of ham

C)8 pounds of ham

D)16 pounds of ham

Q2) Kelly and David are both capable of repairing cars and cooking meals.Which of the following scenarios is not possible?

A)Kelly has a comparative advantage in repairing cars and David has a comparative advantage in cooking meals.

B)Kelly has an absolute advantage in repairing cars and David has an absolute advantage in cooking meals.

C)Kelly has a comparative advantage in repairing cars and in cooking meals.

D)David has an absolute advantage in repairing cars and in cooking meals.

Q3) Refer to Figure 3-16.Hosne's opportunity cost of one purse is

A)4/5 wallet and Merve's opportunity cost of one purse is 2/3 wallet.

B)4/5 wallet and Merve's opportunity cost of one purse is 3/2 wallets.

C)5/4 wallets and Merve's opportunity cost of one purse is 2/3 wallet.

D)5/4 wallets and Merve's opportunity cost of one purse is 3/2 wallets.

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Chapter 3: Interdependence and the Gains From Trade:

Applications of Comparative Advantage

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Q1) Serena Williams should pay someone else to mow her lawn instead of mowing it herself,unless

A)Serena has an absolute advantage over everyone else in mowing her lawn.

B)Serena has a comparative advantage over everyone else in mowing her lawn.

C)Serena's opportunity cost of mowing her lawn is higher than it is for everyone else.

D)All of the above are correct.

Q2) Suppose the U.S.and Japan can both produce airplanes and televisions and the U.S.has a comparative advantage in the production of airplanes while Japan has a comparative advantage in the production of televisions.Also suppose the U.S.has an absolute advantage in the production of both airplanes and televisions.The U.S.should

A)not trade airplanes or televisions with Japan.

B)import airplanes from Japan and export televisions to Japan.

C)export airplanes to Japan and import televisions from Japan.

D)export both airplanes and televisions to Japan.

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Chapter 3: Interdependence and the Gains From Trade:

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Q1) Which of the following is not an example of the principle that trade can make everyone better off?

A)Americans buy tube socks from China.

B)Residents of Maine drink orange juice from Florida.

C)A homeowner hires the kid next door to mow the lawn.

D)All of the above are examples of the principle that trade can make everyone better off.

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Chapter 3: Interdependence

Gains

Trade:

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Q1) Jennifer takes 2 hours to make a loaf of bread and 1 hour to make a dozen cookies.Janet takes 3 hours to make a loaf of bread and 3/4 hours to make a dozen cookies.Who,if either,has an absolute advantage baking bread? Who,if either,has an absolute advantage making cookies?

Q2) Julia can fix a meal in 1 hour,and her opportunity cost of one hour is $50.Jacque can fix the same kind of meal in 2 hours,and his opportunity cost of one hour is $20.Will both Julia and Jacque be better off if she pays him $45 per meal to fix her meals? Explain.

Q3) Refer to Figure 3-26.What is Mary's opportunity cost of one cookie?

Q4) Refer to Figure 3-26.What is Kate's opportunity cost of one muffin?

Q5) Charlotte can produce pork and beans and can switch between producing them at a constant rate.If it takes her 10 hours to produce a pound of pork and 5 hours to produce a pound of beans,what is her opportunity cost of pork and what is her opportunity cost of beans?

Q6) With eight hours of work Elmer can produce 20 pounds of carrots or 15 pounds of peas.With eight hours Bugs can produce 10 pounds of carrots or 7.5 pounds of peas.Can Elmer and Bugs gain from trade? Defend your answer.

Q7) Refer to Scenario 3-1.Which if any good(s)does Catherine have an absolute advantage producing?

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Chapter 3: Interdependence and the Gains From Trade:

Part B

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Q1) Interdependence among individuals and interdependence among nations are both based on the gains from trade.

A)True

B)False

Q2) In an economy consisting of two people producing two goods,it is possible for one person to have the absolute advantage and the comparative advantage in both goods.

A)True

B)False

Q3) Trade can only benefit a nation if that nation has an absolute advantage in the production of that good.

A)True

B)False

Q4) It is possible for the U.S.to gain from trade with Germany even if it takes U.S.workers fewer hours to produce every good than it takes German workers.

A)True

B)False

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Chapter 4: The Market Forces of Supply and Demand

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Q1) The two words most often used by economists are

A)prices and quantities.

B)resources and allocation.

C)supply and demand.

D)efficiency and equity.

Q2) In a market economy,supply and demand are important because they

A)are direct policy tools used by government agencies to regulate the economy.

B)illustrate when an market is in equilibrium,but they are not helpful when a market is out of equilibrium.

C)can be used to predict the impact on the economy of various events and policies.

D)All of the above are correct.

Q3) The two words economists use most often are

A)inflation and trade.

B)supply and demand.

C)competition and prices.

D)markets and equilibrium.

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Chapter 4: The Market Forces of Supply and

Demand:Markets and Competition

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Q1) The term price takers refers to buyers and sellers in A)perfectly competitive markets.

B)monopolistic markets.

C)markets that are regulated by the government.

D)markets in which buyers cannot buy all they want and/or sellers cannot sell all they want.

Q2) A competitive market is one in which there

A)is only one seller,but there are many buyers.

B)are many sellers,and each seller has the ability to set the price of his product.

C)are many sellers,and they compete with one another in such a way that some sellers are always being forced out of the market.

D)are so many buyers and so many sellers that each has a negligible impact on the price of the product.

Q3) A group of buyers and sellers of a particular good or service is called a(n) A)coalition.

B)economy.

C)market.

D)competition.

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Chapter 4: The Market Forces of Supply and Demand: Demand

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Q1) Which of the following is not a determinant of demand?

A)the price of a resource that is used to produce the good

B)the price of a complementary good

C)the price of the good next month

D)the price of a substitute good

Q2) If a increase in income decreases the demand for a good,then the good is a(n)

A)substitute good.

B)complementary good.

C)normal good.

D)inferior good.

Q3) Suppose the American Medical Association announces that men who shave their heads are less likely to die of heart failure.We could expect the current demand for A)hair gel to increase.

B)razors to increase.

C)combs to increase.

D)shampoo to increase.

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Chapter 4: The Market Forces of Supply and Demand: Supply

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Q1) A CPA recently has come to expect higher prices for expert tax advice in the near future.We would expect

A)the CPA to supply more expert tax advice now than she was supplying previously.

B)the CPA to supply less expert tax advice now than she was supplying previously.

C)the demand for this CPA's expert tax advice to fall.

D)no change in the CPA's current supply;instead,future supply will be affected.

Q2) Refer to Figure 4-11.The movement from point A to point B on the graph is called

A)a decrease in supply.

B)an increase in supply.

C)an increase in the quantity supplied.

D)a decrease in the quantity supplied.

Q3) A decrease in the number of sellers in the market causes

A)the supply curve to shift to the left.

B)the supply curve to shift to the right.

C)a movement up and to the right along a stationary supply curve.

D)a movement downward and to the left along a stationary supply curve.

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Chapter 4: The Market Forces of Supply and Demand:

Supply and Demand Together

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Q1) Refer to Figure 4-18.At a price of $35,there would be a

A)shortage of 400 units.

B)surplus of 200 units.

C)surplus of 400 units.

D)surplus of 600 units.

Q2) What would happen to the equilibrium price and quantity of lattés if the cost of producing steamed milk,which is used to make lattés,rises?

A)Both the equilibrium price and quantity would increase.

B)Both the equilibrium price and quantity would decrease.

C)The equilibrium price would increase,and the equilibrium quantity would decrease.

D)The equilibrium price would decrease,and the equilibrium quantity would increase.

Q3) If there is a shortage of farm laborers,we would expect

A)the wage of farm laborers to increase.

B)the wage of farm laborers to decrease.

C)the price of farm commodities to decrease.

D)a decrease in the demand for substitutes for farm labor.

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Chapter 4: The Market Forces of Supply and

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Q1) Suppose the United States had a short-term shortage of farmers.Which mechanisms would adjust to remove the shortage?

A)The government would provide tax incentives to encourage people to become farmers.

B)The government would subsidize the production of food.

C)The prices of food and the wages of farmers would adjust.

D)There are no mechanisms to remove the shortage.

Q2) In any economic system,scarce resources have to be allocated among competing uses.Market economies harness the forces of

A)government to allocate scarce resources.

B)supply and demand to allocate scarce resources.

C)credit cards to allocate scarce resources.

D)nature to allocate scarce resources.

Q3) Who gets scarce resources in a market economy?

A)the government

B)whoever the government decides gets them

C)whoever wants them

D)whoever is willing and able to pay the price

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Chapter 4: The Market Forces of Supply and Demand: Part

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38 Verified Questions

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Sample Questions

Q1) Refer to Figure 4-31.Suppose there is an improvement in technology in this market and the price of lamps,a complementary good,increases.What changes do you predict in the equilibrium price and quantity?

Q2) A group of buyers and sellers of a particular good or service is called a

Q3) If income rises in the market for an inferior good,will the demand curve for the inferior good shift to the right or to the left?

Q4) Refer to Figure 4-30.In this market for iPhones,the technology improves while all other factors remain constant.Which curve(s)shift(s)and in which direction?

Q5) Refer to Figure 4-29.If the price increases from $5 to $6,how does the quantity demanded change?

Q6) Suppose goods A and B are substitutes.If the price of good A increases,will the demand for good B increase or decrease?

Q7) Refer to Figure 4-30.In this market for iPhones,the technology improves while all other factors remain constant.Explain the change(s)in the equilibrium price and quantity.

Q8) Suppose consumers expect the price of a good to be higher in the future than it is today.Would the current demand for the good increase or decrease?

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Chapter 4: The Market Forces of Supply and Demand: Part

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Sample Questions

Q1) If orange juice and apple juice are substitutes,an increase in the price of orange juice will shift the demand curve for apple juice to the right.

A)True

B)False

Q2) Individual demand curves are summed horizontally to obtain the market demand curve.

A)True

B)False

Q3) Suppose the demand for calendars increases in November.At the same time,the price of the ink used in the production of calendars increases.In the market for calendars,if the size of the shift of the demand curve is larger than the size of the shift of the supply curve,then the equilibrium quantity rises.

A)True

B)False

Q4) If a good or service has only one seller,then the seller is called a monopoly.

A)True

B)False

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Chapter 5: Elasticity and Its Applications

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Sample Questions

Q1) When studying how some event or policy affects a market,elasticity provides information on the

A)equity effects on the market by identifying the winners and losers.

B)magnitude of the effect on the market.

C)speed of adjustment of the market in response to the event or policy.

D)number of market participants who are directly affected by the event or policy.

Q2) Elasticity is

A)a measure of how much buyers and sellers respond to changes in market conditions.

B)the study of how the allocation of resources affects economic well-being.

C)the maximum amount that a buyer will pay for a good.

D)the value of everything a seller must give up to produce a good.

Q3) In general,elasticity is a measure of

A)the extent to which advances in technology are adopted by producers.

B)the extent to which a market is competitive.

C)how firms' profits respond to changes in market prices.

D)how much buyers and sellers respond to changes in market conditions.

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33

Chapter 5: Elasticity and Its Applications: The Elasticity of Demand

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Sample Questions

Q1) You have just been hired as a business consultant to determine what pricing policy would be appropriate to increase the total revenue of a bakery.The first step you would take would be to

A)increase the price of every loaf of bread in the store.

B)look for ways to cut costs and increase profit for the bakery.

C)determine the price elasticity of demand for the bakery's products.

D)determine the price elasticity of supply for the bakery's products.

Q2) When the price of chai tea lattés is $5,Maxine buys 20 per month.When the price is $4,she buys 30 per month.Maxine's demand for chai tea lattés is

A)elastic,and her demand curve would be relatively flat.

B)elastic,and her demand curve would be relatively steep.

C)inelastic,and her demand curve would be relatively flat.

D)inelastic,and her demand curve would be relatively steep.

Q3) Demand is said to have unit elasticity if the price elasticity of demand is

A)less than 1.

B)greater than 1.

C)equal to 1.

D)equal to 0.

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Chapter 5: Elasticity and Its Applications: The Elasticity of Supply

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Sample Questions

Q1) In which of the following situations would supply be the most elastic?

A)An auto parts manufacturer is operating at capacity.

B)A real estate developer in Boston is looking to build condos on the waterfront.

C)A furniture manufacturer is operating its factory 8 hours per day.

D)A hotel has all of its rooms booked for each night of the next 3 months.

Q2) Refer to Figure 5-14.Over which range is the supply curve in this figure the most elastic?

A)$16 to $40

B)$40 to $100

C)$100 to $220

D)$220 to $430

Q3) At price of $1.25,a paper manufacturer is willing to supply 150 spiral notebooks per day.At a price of $1.50,the paper manufacturer is willing to supply 175 spiral notebooks per day.Using the midpoint method,the price elasticity of supply is about

A)1.18.

B)1.00.

C)0.85.

D)0.25.

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Sample Questions

Q1) A drug interdiction program that successfully reduces the supply of illegal drugs in the United States likely will

A)raise the price,reduce the quantity,decrease total revenues,and decrease crime.

B)lower the price,increase the quantity,increase total revenues,and increase crime.

C)raise the price,increase the quantity,decrease total revenues,and increase crime.

D)raise the price,reduce the quantity,increase total revenues,and increase crime.

Q2) Refer to Scenario 5-3.The equilibrium quantity will

A)increase in both the aged cheddar cheese and bread markets.

B)increase in the aged cheddar cheese market and decrease in the bread market.

C)decrease in the aged cheddar cheese market and increase in the bread market.

D)decrease in both the aged cheddar cheese and bread markets.

Q3) Refer to Scenario 5-4.The change in equilibrium price will be

A)greater in the milk market than in the beef market.

B)greater in the beef market than in the milk market.

C)the same in the milk and beef markets.

D)Any of the above could be correct.

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Chapter 5: Elasticity and Its Applications: Part A

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Sample Questions

Q1) If the quantity supplied is exactly the same regardless of the price,supply is

Q2) Suppose the price elasticity of demand for a product is 1.3.If a supplier wants to increase revenue,what change should it make to price,if any?

Q3) Refer to Scenario 5-6.Considering the cross price elasticity of demand for mobile and landline telephone service,is the cross price elasticity of demand positive or negative and do the consumers of Plainville regard these goods as substitutes or complements?

Q4) For which of the following goods would demand be most price elastic: a car,a sedan,a Honda sedan,a Honda Accord,a black Honda Accord?

Q5) Refer to Scenario 5-2.Using the midpoint method,if the price of good X is $10 and the price of good Y increases from $8 to $10,the cross price elasticity of demand is about

Q6) When the Shaffers had a monthly income of $4,000,they usually ate out 8 times a month.Now that the couple makes $4,500 a month,they eat out 10 times a month.Compute the couple's income elasticity of demand using the midpoint method.Explain your answer.Is a restaurant meal a normal or inferior good to the couple?

Q7) If a supply curve is perfectly vertical,what is the value of the price elasticity of supply?

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Chapter 5: Elasticity and Its Applications: Part B

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Sample Questions

Q1) In general,demand curves for necessities tend to be price elastic.

A)True

B)False

Q2) Goods with close substitutes tend to have more elastic demands than do goods without close substitutes.

A)True

B)False

Q3) The price elasticity of demand is defined as the percentage change in price divided by the percentage change in quantity demanded.

A)True

B)False

Q4) The demand for Rice Krispies is more elastic than the demand for cereal in general.

A)True

B)False

Q5) If a firm is facing inelastic demand,then the firm should decrease price to increase revenue.

A)True B)False

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Chapter 6: Supply Demand and Government Policies

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Q1) Price controls

A)always produce a fair outcome.

B)always produce an efficient outcome.

C)can generate inequities of their own.

D)All of the above are correct.

Q2) Which of the following is not an example of a public policy?

A)rent-control laws

B)minimum-wage laws

C)taxes

D)equilibrium laws

Q3) Policymakers use taxes

A)to raise revenue for public purposes but not to influence market outcomes.

B)both to raise revenue for public purposes and to influence market outcomes.

C)when they realize that price controls alone are insufficient to correct market inequities.

D)only in those markets in which the burden of the tax falls clearly on the sellers.

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Chapter 6: Supply Demand and Government Policies:

Controls on Prices

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Sample Questions

Q1) A shortage results when a

A)nonbinding price ceiling is imposed on a market.

B)nonbinding price ceiling is removed from a market.

C)binding price ceiling is imposed on a market.

D)binding price ceiling is removed from a market.

Q2) Which of the following is not a result of rent control?

A)fewer new apartments offered for rent

B)less maintenance provided by landlords

C)bribery

D)higher quality housing

Q3) When government imposes a price ceiling or a price floor on a market,

A)price no longer serves as a rationing device.

B)efficiency in the market is enhanced.

C)shortages and surpluses are eliminated.

D)both buyers and sellers become better off.

Q4) In 2012,the U.S.minimum wage according to federal law was

A)$4.25 per hour.

B)$5.15 per hour.

C)$5.75 per hour.

D)$7.25 per hour.

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Chapter 6: Supply Demand and Government Policies: Taxes

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199 Verified Questions

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Sample Questions

Q1) Refer to Figure 6-25.The burden of the tax on sellers is

A)$1 per unit.

B)$1.50 per unit.

C)$2 per unit.

D)$3 per unit.

Q2) Refer to Figure 6-30.In which market will the majority of the tax burden fall on sellers?

A)the market shown in panel (a).

B)the market shown in panel (b).

C)the market shown in panel (c).

D)All of the above are correct.

Q3) A payroll tax is a

A)fixed number of dollars that every firm must pay to the government for each worker that the firm hires.

B)tax that each firm must pay to the government before the firm can hire workers and operate its business.

C)tax on the wages that firms pay their workers.

D)tax on all wages above the minimum wage.

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Chapter 6: Supply Demand and Government Policies: Part

46 Verified Questions

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Sample Questions

Q1) Refer to Figure 6-34.If the government imposes a tax of $6 per unit in this market,how much is the burden of the tax on the buyers in this market?

Q2) Refer to Figure 6-33.Suppose a $4 per-unit tax is imposed on the sellers of this good.How many units of this good will be sold after the tax is imposed?

Q3) Refer to Figure 6-31.If the government set a price floor at $9,would there be a shortage or surplus,and how large would be the shortage/surplus?

Q4) If the supply curve is more price elastic than the demand curve,will the buyers or the sellers bear a greater burden of a tax? Draw a diagram to illustrate your answer.

Q5) Refer to Figure 6-34.If the government imposes a tax of $6 per unit in this market,how many units will be bought and sold in the market after the tax is imposed?

Q6) Refer to Figure 6-31.If the government set a price floor at $15,would there be a shortage or surplus,and how large would be the shortage/surplus?

Q7) Refer to Figure 6-32.If the government set a price floor at $70,would there be a shortage or surplus,and how large would be the shortage/surplus?

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Page 42

Chapter 6: Supply Demand and Government Policies: Part B

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Sample Questions

Q1) If a tax is imposed on the sellers of a product,then the tax burden will fall entirely on the sellers.

A)True

B)False

Q2) A price ceiling caused the gasoline shortage of 1973 in the United States.

A)True

B)False

Q3) Price controls can generate inequities.

A)True

B)False

Q4) Since half of the FICA tax is paid by firms and the other half is paid by workers,the burden of the tax must fall equally on firms and workers.

A)True

B)False

Q5) A price floor set below the equilibrium price causes a surplus in the market. A)True

B)False

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Chapter 7: Consumers Producers and the Efficiency of Markets

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Sample Questions

Q1) An example of positive analysis is studying

A)how market forces produce equilibrium.

B)whether equilibrium outcomes are fair.

C)whether equilibrium outcomes are socially desirable.

D)if income distributions are fair.

Q2) Which of the Ten Principles of Economics does welfare economics explain more fully?

A)The cost of something is what you give up to get it.

B)Markets are usually a good way to organize economic activity.

C)Trade can make everyone better off.

D)A country's standard of living depends on its ability to produce goods and services.

Q3) Welfare economics is the study of how

A)the allocation of resources affects economic well-being.

B)a price ceiling compares to a price floor.

C)the government helps poor people.

D)a consumer's optimal choice affects her demand curve.

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44

Chapter 7: Consumers Producers and the Efficiency of

Markets: Consumer Surplus

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Sample Questions

Q1) Refer to Figure 7-1.If the price of the good is $150,then consumer surplus amounts to A)$150.

B)$200.

C)$250.

D)$300.

Q2) A demand curve reflects each of the following except the A)willingness to pay of all buyers in the market.

B)value each buyer in the market places on the good.

C)highest price buyers are willing to pay for each quantity.

D)ability of buyers to obtain the quantity they desire.

Q3) Refer to Figure 7-1.If the price of the good is $250,then consumer surplus amounts to A)$50.

B)$100.

C)$150.

D)$200.

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Chapter 7: Consumers Producers and the Efficiency of

Markets: Producer Surplus

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92 Verified Questions

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Sample Questions

Q1) Refer to Figure 7-15.When the price falls from P2 to P1,which of the following would not be true?

A)The sellers who still sell the good are worse off because they now receive less.

B)Some sellers leave the market because they are not willing to sell the good at the lower price.

C)The total cost of what is now sold by sellers is actually higher than it was before the decrease in the price.

D)Producer surplus would fall by area A + B.

Q2) George produces cupcakes.His production cost is $10 per dozen.He sells the cupcakes for $16 per dozen.His producer surplus per dozen cupcakes is

A)$6.

B)$10.

C)$16.

D)$26.

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46

Chapter 7: Consumers Producers and the Efficiency of

Markets: Market Efficiency

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Sample Questions

Q1) Inefficiency exists in an economy when a good is

A)not being consumed by buyers who value it most highly.

B)not distributed fairly among buyers.

C)not produced because buyers do not value it very highly.

D)being produced with less than all available resources.

Q2) Refer to Figure 7-21.Which area represents producer surplus when the price is P1?

A)A

B)B

C)C

D)D

Q3) Economists say that a market where goods are not consumed by those valuing the goods most highly is A)laissez-faire..

B)unequal.

C)inefficient.

D)rational.

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Chapter 7: Consumers Producers and the Efficiency of

Markets: Conclusion Market Efficiency and Market Failure

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Sample Questions

Q1) Market power and externalities are examples of A)laissez-faire economics.

B)public policy.

C)market failure.

D)welfare economics.

Q2) Which of the following is not correct?

A)Market power can cause markets to be inefficient.

B)When the decisions of buyers and sellers affect nonparticipants,markets may be inefficient.

C)The tools of welfare economics cannot help economists when markets are inefficient.

D)Externalities can cause markets to be inefficient.

Q3) Inefficiency can be caused in a market by the presence of A)market power.

B)externalities.

C)imperfectly competitive markets.

D)All of the above are correct.

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Chapter 7: Consumers Producers and the Efficiency of

Markets: Part A

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Sample Questions

Q1) Refer to Figure 7-32.If the government imposed a price ceiling at $20 in this market,how much are consumer surplus,producer surplus,and total surplus?

Q2) Refer to Figure 7-31.If the market equilibrium price is $25,how much is total producer surplus in this market?

Q3) Refer to Figure 7-32.If the government imposed a price floor at $35 in this market,how much is consumer surplus?

Q4) Refer to Figure 7-30.If the market equilibrium price falls from $120 to $80,how much is the increase in consumer surplus to the consumers who were initially in the market at the $120 price?

Q5) Refer to Figure 7-31.If the market equilibrium price rises from $25 to $35,how much is the increase in producer surplus to the producers supplying units at the initial $25 price?

Q6) Refer to Figure 7-33.How much is total surplus in this market at the equilibrium price?

Q7) Refer to Scenario 7-1.If the market equilibrium price falls from $10 to $5,how much additional consumer surplus do consumers initially in the market at the $10 price receive?

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Chapter 7: Consumers Producers and the Efficiency of

Markets: Part B

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Sample Questions

Q1) Producing a soccer ball costs Jake $5.He sells it to Darby for $35.Darby values the soccer ball at $50.For this transaction,the total surplus in the market is $40.

A)True

B)False

Q2) Markets will always allocate resources efficiently.

A)True

B)False

Q3) If the government imposes a binding price floor in a market,then the consumer surplus in that market will increase.

A)True

B)False

Q4) The area below the demand curve and above the supply curve measures the producer surplus in a market.

A)True

B)False

Q5) Ticket scalping can increase total surplus in the market for tickets to sporting events. A)True

B)False

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Chapter 8: Application the Cost of Taxation

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Sample Questions

Q1) Who once said that taxes are the price we pay for a civilized society?

A)Aristotle

B)George Washington

C)Oliver Wendell Holmes,Jr.

D)Ronald Reagan

Q2) Anger over British taxes played a significant role in bringing about the A)election of John Adams as the second American president.

B)American Revolution.

C)War of 1812.

D)"no new taxes" clause in the U.S.Constitution.

Q3) In 1776,the American Revolution was sparked by anger over A)the extravagant lifestyle of British royalty.

B)the crimes of British soldiers stationed in the American colonies.

C)British taxes imposed on the American colonies.

D)the failure of the British to protect American colonists from attack by hostile Native Americans.

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Chapter 8: Application the Cost of Taxation: The

Deadweight Loss of Taxation

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Sample Questions

Q1) When a tax is levied on buyers,the

A)supply curves shifts upward by the amount of the tax.

B)tax creates a wedge between the price buyers effectively pay and the price sellers receive.

C)tax has no effect on the well-being of sellers.

D)All of the above are correct.

Q2) Suppose a tax is imposed on the sellers of fast-food French fries.The burden of the tax will

A)fall entirely on the buyers of fast-food French fries.

B)fall entirely on the sellers of fast-food French fries.

C)be shared equally by the buyers and sellers of fast-food French fries.

D)be shared by the buyers and sellers of fast-food French fries but not necessarily equally.

Q3) Refer to Figure 8-8.The government collects tax revenue that is the area

A)L.

B)B+D.

C)C+F.

D)F+G+L.

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Chapter 8: Application the Cost of Taxation: The Determinants of

the Deadweight

Loss

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Q1) Suppose a tax of $1 per unit is imposed on a good.The more elastic the demand for the good,other things equal,

A)the larger is the decrease in quantity demanded as a result of the tax.

B)the smaller is the tax burden on buyers relative to the tax burden on sellers.

C)the larger is the deadweight loss of the tax.

D)All of the above are correct.

Q2) The less freedom young mothers have to work outside the home,the

A)more elastic the supply of labor will be.

B)less elastic the supply of labor will be.

C)more horizontal the labor supply curve will be.

D)larger is the decrease in employment that will result from a tax on labor.

Q3) The deadweight loss from a $3 tax will be largest in a market with

A)inelastic supply and elastic demand.

B)inelastic supply and inelastic demand.

C)elastic supply and elastic demand.

D)elastic supply and inelastic demand.

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Page 53

Chapter 8: Application the Cost of Taxation: Deadweight

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Sample Questions

Q1) In which of the following instances would the deadweight loss of the tax on airline tickets increase by a factor of 9?

A)The tax on airline tickets increases from $20 per ticket to $60 per ticket.

B)The tax on airline tickets increases from $20 per ticket to $90 per ticket.

C)The tax on airline tickets increases from $15 per ticket to $60 per ticket.

D)The tax on airline tickets increases from $15 per ticket to $135 per ticket.

Q2) As the tax on a good increases from $1 per unit to $2 per unit to $3 per unit and so on,the

A)tax revenue increases at first,but it eventually peaks and then decreases.

B)deadweight loss increases at first,but it eventually peaks and then decreases.

C)tax revenue always increases,and the deadweight loss always increases.

D)tax revenue always decreases,and the deadweight loss always increases.

Q3) Assume that for good X the supply curve for a good is a typical,upward-sloping straight line,and the demand curve is a typical downward-sloping straight line.If the good is taxed,and the tax is doubled,the

A)base of the triangle that represents the deadweight loss quadruples.

B)height of the triangle that represents the deadweight loss doubles.

C)deadweight loss of the tax doubles.

D)All of the above are correct.

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Chapter 8: Application the Cost of Taxation: Conclusion

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Q1) Taxes are of interest to

A)microeconomists because they consider how to balance equality and efficiency. B)microeconomists because they consider how best to design a tax system.

C)macroeconomists because they consider how policymakers can use the tax system to stabilize economic activity.

D)All of the above are correct.

Q2) Taxes are costly to market participants because they A)transfer resources from market participants to the government. B)alter incentives.

C)distort market outcomes.

D)All of the above are correct.

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Chapter 8: Application the Cost of Taxation: Part A

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Sample Questions

Q1) Suppose that instead of a supply-demand diagram,you are given the following information:

Q_s = 100 + 3P

Q_d = 400 - 2P

From this information compute equilibrium price and quantity.Now suppose that a tax is placed on buyers so that Q_d = 400 - 2(P + T).

If T = 15,solve for the new equilibrium price and quantity.(Note: P is the price received by sellers and P + T is the price paid by buyers. )Compare these answers for equilibrium price and quantity with your first answers.What does this show you?

Q2) Suppose that the market for product X is characterized by a typical,downward-sloping,linear demand curve and a typical,upward-sloping,linear supply curve.If a $2 tax per unit results in a deadweight loss of $200,how large would be the deadweight loss from a $4 tax per unit?

Q3) Suppose the demand curve and the supply curve in a market are both linear,and suppose the price elasticity of supply is 0.5.Will the deadweight loss from a $3 tax per unit be larger if the price elasticity of demand is 0.3 or if the price elasticity of demand is 0.7?

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Chapter 8: Application the Cost of Taxation: Part B

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Sample Questions

Q1) Economists use the government's tax revenue to measure the public benefit from a tax.

A)True B)False

Q2) The larger the deadweight loss from taxation,the larger the cost of government programs.

A)True B)False

Q3) If the size of a tax doubles,the deadweight loss doubles. A)True B)False

Q4) If the government imposes a $3 tax in a market,the equilibrium price will rise by $3. A)True B)False

Q5) The more elastic the supply,the larger the deadweight loss from a tax,all else equal. A)True B)False

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Page 57

Chapter 9: Application International Trade

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Sample Questions

Q1) A logical starting point from which the study of international trade begins is

A)the recognition that not all markets are competitive.

B)the recognition that government intervention in markets sometimes enhances the economic welfare of the society.

C)the principle of absolute advantage.

D)the principle of comparative advantage.

Q2) Which of the following is not an important question for economic policy raised by the experience of the textile industry?

A)How does international trade affect consumer well-being?

B)Who gains and who loses from free trade among countries?

C)How do the gains from trade compare to the losses?

D)Which argument for restricting free trade is politically feasible?

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Chapter 9: Application International Trade: The Determinants of Trade

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Sample Questions

Q1) Jamaica has a comparative advantage in the production of aluminum,but currently allows no international trade in aluminum.We can conclude that

A)the domestic price of aluminum in Jamaica is higher than the world price for aluminum.

B)Jamaica has an absolute advantage in the production of aluminum.

C)Jamaica should import aluminum.

D)the domestic price of aluminum in Jamaica is lower than the world price for aluminum.

Q2) What is the fundamental basis for trade among nations?

A)shortages or surpluses in nations that do not trade

B)misguided economic policies

C)absolute advantage

D)comparative advantage

Q3) If the world price of coffee is lower than Colombia's domestic price of coffee without trade,then Colombia

A)should import coffee.

B)has a comparative advantage in coffee.

C)should produce just enough coffee to satisfy domestic demand.

D)should produce no coffee domestically.

Page 59

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Chapter 9: Application International Trade: The Winners

and Losers From Trade

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Sample Questions

Q1) Suppose Iceland goes from being an isolated country to being an exporter of coats.As a result,

A)consumer surplus increases for consumers of coats in Iceland.

B)producer surplus increases for producers of coats in Iceland.

C)total surplus remains unchanged in the coat market in Iceland.

D)it is reasonable to infer that other countries have a comparative advantage over Iceland in coat production.

Q2) Import quotas and tariffs produce similar results.Which of the following is not one of those results?

A)The domestic price of the good increases.

B)Consumer surplus of domestic consumers increases.

C)Producer surplus of domestic producers increases.

D)A deadweight loss is experienced by the domestic country.

Q3) Refer to Figure 9-6.When the tariff is imposed,domestic consumers

A)lose by $200.

B)lose by $450.

C)gain by $200.

D)gain by $450.

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Chapter 9: Application International Trade: The Arguments for Restricting Trade

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Sample Questions

Q1) Workers displaced by trade eventually find jobs in

A)another country.

B)the government sector.

C)the industries in which the country has a comparative advantage.

D)a different company in the same industry.

Q2) A possible outcome of the multilateral approach to free trade is that such an approach can

A)win political support when a unilateral approach cannot.

B)result in more restricted trade than under a unilateral approach,when international negotiations fail.

C)result in drastic reductions in tariffs for many countries.

D)All of the above are correct.

Q3) If the United States threatens to impose a tariff on Honduran blueberries if Honduras does not remove agricultural subsidies,the United States will be

A)better off no matter how Honduras responds.

B)better off if Honduras gives in,and will be no worse off if it doesn't.

C)worse off if Honduras doesn't give in to the threat.

D)worse off no matter how Honduras responds.

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Chapter 9: Application International Trade: Conclusion

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Sample Questions

Q1) Economists view the fact that Florida grows oranges,Texas pumps oil,and California makes wine as

A)confirmation of the virtues of free trade.

B)confirmation of the infant-industry argument.

C)confirmation that free trade agreements are not necessary.

D)confirmation that specialization in absolute advantage works.

Q2) Most economists view the United States' experience with trade as

A)one from which no firm conclusions about the virtues of free trade can be reached,due to the relatively short history of international trade in the U.S.

B)one from which no firm conclusions about the virtues of free trade can be reached,due to the lack of trade within the U.S.throughout most of the early history of the U.S.

C)an ongoing experiment that confirms the virtues of free trade.

D)an ongoing experiment that calls into serious question the notion that free trade enhances the economic well-being of a nation.

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Chapter 9: Application International Trade: Part A

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Sample Questions

Q1) Refer to Figure 9-26.With no trade allowed,how much are consumer surplus,producer surplus,and total surplus in this market?

Q2) List four benefits of international trade.

Q3) Refer to Scenario 9-3.Suppose the world price in this market is $8 per unit,and suppose the country imposes a $1 per unit tariff.If the country allows trade with a tariff,how much is the deadweight loss caused by the tariff?

Q4) Refer to Figure 9-28.With no trade allowed,what are the equilibrium price and equilibrium quantity in this market?

Q5) Refer to Figure 9-29.Suppose the country imposes a $1 per unit tariff.If the country allows trade with a tariff,how many units will be imported?

Q6) How does an import quota differ from an equivalent tariff?

Q7) Suppose in the country of Jumanji that the price of wheat with no trade allowed is above the world price of wheat.If Jumanji allows free trade,will Jumanji be an importer or an exporter of wheat?

Q8) Suppose in the country of Nash that the price of corn is $4 per bushel with no trade allowed.If the world price of corn is $3 per bushel and if Nash allows free trade,will Nash be an importer or an exporter of corn?

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Chapter 9: Application International Trade: Part B

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Sample Questions

Q1) The nation of Cranolia used to prohibit international trade,but now trade is allowed,and Cranolia is exporting furniture.Relative to the previous no-trade situation,buyers of furniture in Cranolia are now better off.

A)True

B)False

Q2) The imposition of a tariff on imported wine will increase the domestic price of wine,decrease the quantity of wine imported,and increase the quantity of wine produced domestically.

A)True

B)False

Q3) There are only increases in total surplus when a country exports a good,since more units of the country's output of that good are produced.

A)True

B)False

Q4) Free trade allows firms to realize economies of scale,resulting in higher costs of production.

A)True

B)False

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Page 64

Chapter 10: Measuring a Nations Income

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Q1) Which of the following questions is more likely to be studied by a microeconomist than a macroeconomist?

A)Why do prices in general rise by more in some countries than in others?

B)Why do wages differ across industries?

C)Why do national production and income increase in some periods and not in others?

D)How rapidly is GDP currently increasing?

Q2) Which of the following headlines is more closely related to what microeconomists study than to what macroeconomists study?

A)Unemployment rate falls from 7.5 percent to 7.3 percent.

B)Real GDP falls by 0.4 percent in the third quarter.

C)Inflation was 2.4 percent last year.

D)The price of gasoline rises due to rising oil prices.

Q3) Macroeconomists study

A)the decisions of individual households and firms.

B)the interaction between households and firms.

C)economy-wide phenomena.

D)regulations imposed on firms and unions.

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65

Chapter 10: Measuring a Nations Income: The Economy's

Income and Expenditure

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Q1) According to the circular-flow diagram GDP

A)can be computed as the total income paid by firms or as expenditures on final goods and services.

B)can be computed as the total income paid by firms,but not as expenditures on final goods and services.

C)can be computed as expenditures on final goods and services,but not as the total income paid by firms.

D)cannot be computed as either total income paid by firms or expenditures on final goods and services.

Q2) In the GDP accounts production equals A)income.

B)income + saving.

C)income - government expenditures.

D)income - imports.

Q3) In a simple circular-flow diagram,firms use the money they get from a sale to A)pay wages to workers.

B)pay rent to landlords.

C)pay profit to the firms' owners.

D)All of the above are correct.

Page 66

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Chapter 10: Measuring a Nations Income: The Measurement

of GDP

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Sample Questions

Q1) One bag of flour is sold for $1.00 to a bakery,which uses the flour to bake bread that is sold for $3.00 to consumers.A second bag of flour is sold for $1 to a grocery store who sells it to a consumer for $2.00.Taking these four transactions into account,what is the effect on GDP?

A)GDP increases by $3.00.

B)GDP increases by $5.00.

C)GDP increases by $6.00.

D)GDP increases by $7.00.

Q2) James owns two houses.He rents one house to the Johnson family for $10,000 per year.He lives in the other house.If he were to rent the house in which he lives,he could earn $12,000 per year in rent.How much do the housing services provided by the two houses contribute to GDP?

A)$0

B)$10,000

C)$12,000

D)$22,000

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Chapter 10: Measuring a Nations Income: The Components of GDP

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Sample Questions

Q1) Which of the following is an example of a durable good?

A)a hair dryer.

B)a suit.

C)a pair of shoes.

D)All of the above are correct.

Q2) In the economy of Talikastan in 2015,exports were $500,GDP was $6400,government purchases were $1700,imports were $400,and investment was $1800.What was Talikastan's consumption in 2015?

A)$2000

B)$2800

C)$3000

D)$3800

Q3) A good is produced by a firm in 2009,added to the firm's inventory in 2010,and sold to a household in 2010.As a result,on net,

A)2009 GDP increased and 2010 GDP decreased.

B)2009 GDP decreased and 2010 GDP increased.

C)2009 GDP did not change and 2010 GDP increased.

D)2009 GDP increased and 2010 GDP did not change.

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Chapter 10: Measuring a Nations Income: Real Versus Nominal

GDP

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Sample Questions

Q1) Suppose an economy's production consists only of corn and soybeans.In 2010,20 bushels of corn are sold at $4 per bushel and 10 bushels of soybeans are sold at $2 per bushel.In 2009,the price of corn was $2 per bushel and the price of soybeans was $1 per bushel.Using 2009 as the base year,it follows that,for 2010,

A)nominal GDP is $50,real GDP is $100,and the GDP deflator is 50.

B)nominal GDP is $50,real GDP is $100,and the GDP deflator is 200.

C)nominal GDP is $100,real GDP is $50,and the GDP deflator is 50.

D)nominal GDP is $100,real GDP is $50,and the GDP deflator is 200.

Q2) If nominal GDP doubles and the GDP deflator doubles,then real GDP

A)remains constant.

B)doubles.

C)triples.

D)quadruples.

Q3) Which of the following always uses prices and quantities from the same period?

A)both nominal and real GDP.

B)nominal GDP but not real GDP.

C)real GDP but not nominal GDP.

D)neither nominal or real GDP.

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Chapter 10: Measuring a Nations Income: Is GDP a Good Measure of Economic Well-Being

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Sample Questions

Q1) Suppose the government passes a law eliminating holidays and,as a result,the production of goods and services increases because people work more days per year (and thus enjoy less leisure per year).Based on this scenario,which of the following statements is correct?

A)GDP would definitely increase,despite the fact that GDP includes leisure.

B)GDP would definitely increase because GDP excludes leisure.

C)GDP could either increase or decrease because GDP includes leisure.

D)GDP could either increase or decrease because GDP excludes leisure.

Q2) Which of the following is a true statement?

A)International data leave few doubts that a nation's GDP per person is associated with its citizens' standard of living.

B)Rich and poor countries often have vastly different standards of living,but similar levels of real GDP per person.

C)The value of leisure time is included in the calculation of GDP per person.

D)International data indicate that measures on the distribution of income are closely associated with GDP per person.

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70

Chapter 10: Measuring a Nations Income: Part A

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Sample Questions

Q1) Which component of GDP includes spending on new structures and equipment?

Q2) Refer to Figure 23-2.List the locations associated with the flow of inputs and outputs.

Q3) Foreign countries buy $1.2 trillion of U.S.goods and services.U.S.residents purchase $1.8 trillion of foreign goods and services.What is net exports?

Q4) Are sales of used goods included in GDP? Explain why or why not.Hint: Remember how GDP is defined.

Q5) What are exports,and how are they different from imports?

Q6) Calculate GDP for a country with investment of $2 trillion,government purchases of $3 trillion,capital depreciation of $1.5 trillion,consumption of $10 trillion,exports of $3.4 trillion,and imports of $3.9 trillion.

Q7) Consumption is $5.5 trillion,investment is $1 trillion,government expenditures are $1.5 trillion,transfer payments are $.5 trillion,exports are $.75 trillion and imports are $1.25 trillion.What is GDP?

Q8) What measure of GDP shows the value of goods and services produced if we valued these good and services at the prices that prevailed in some specific year in the past?

Q9) What are transfer payments,and how do they affect the calculation of GDP?

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Chapter 10: Measuring a Nations Income: Part B

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Sample Questions

Q1) The output of goods and services produced in the United States has grown on average 3 percent per year since 1965.

A)True

B)False

Q2) Changes in inventory are included in the investment component of GDP.

A)True

B)False

Q3) At a rummage sale,you buy two old books and an old rocking chair;your spending on these items is not included in current GDP.

A)True

B)False

Q4) U.S.GDP includes the market value of rental housing,but not the market value of owner-occupied housing services.

A)True

B)False

Q5) GDP is adjusted to reflect changes in the quality of the environment such as changes in air and water quality.

A)True

B)False

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Chapter 11: Measuring the Cost of Living

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Sample Questions

Q1) The term inflation is used to describe a situation in which

A)the overall level of prices in the economy is increasing.

B)incomes in the economy are increasing.

C)stock-market prices are rising.

D)the economy is growing rapidly.

Q2) Which of the following is not correct?

A)The consumer price index gives economists a way of turning dollar figures into meaningful measures of purchasing power.

B)The consumer price index is used to monitor changes in the cost of living over time.

C)The consumer price index is used by economists to measure the inflation rate.

D)The consumer price index is used to measure the quantity of goods and services that the economy is producing.

Q3) Economists use the term inflation to describe a situation in which

A)some prices are rising faster than others.

B)the economy's overall price level is rising.

C)the economy's overall price level is high,but not necessarily rising.

D)the economy's overall output of goods and services is rising faster than the economy's overall price level.

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73

Chapter 11: Measuring the Cost of Living: The Consumer Price Index

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Sample Questions

Q1) In addition to the consumer price index,the Bureau of Labor Statistics also calculates the

A)macroeconomic price index.

B)producer price index.

C)rental unit price index.

D)terms of trade.

Q2) The consumer price index and the GDP deflator are two alternative measures of the overall price level.Which of the following statements about the two measures is correct?

A)The two measures are constructed differently,but they always indicate the same inflation rate.

B)The substitution bias applies equally to both measures.

C)A change in the price of Korean televisions is reflected in the U.S.consumer price index but not in the U.S.GDP deflator.

D)All of the above are correct.

Q3) If the price of Spanish olives imported into the United States decreases,then

A)both the GDP deflator and the consumer price index will decrease.

B)neither the GDP deflator nor the consumer price index will decrease.

C)the GDP deflator will decrease,but the consumer price index will not decrease.

D)the consumer price index will decrease,but the GDP deflator will not decrease.

Page 74

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Chapter 11: Measuring the Cost of Living: Correcting

Economic Variables for the Effects of Inflation

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Sample Questions

Q1) Janelle earned a salary of $62,000 in 2004 and $80,000 in 2014.The consumer price index was 126 in 2004 and 170 in 2014.Janelle's 2004 salary in 2014 dollars is

A)$45,953.

B)$89,280.

C)$107,953.

D)$83,651.

Q2) If the nominal interest rate is 9 percent and the real interest rate is 3 percent,then the inflation rate is

A)-6 percent.

B)3 percent.

C)6 percent.

D)12 percent.

Q3) If the CPI was 104 in 1967 and is 390 today,then $10 in 1967 purchased the same amount of goods and services as

A)$2.67 purchases today.

B)$37.50 purchases today.

C)$39.00 purchases today.

D)$104.00 purchases today.

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Chapter 11: Measuring the Cost of Living: Part A

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Sample Questions

Q1) If the inflation rate decreased from 3.33% to 2.90% between October and November,while the nominal interest rate increased from 4.75% to 4.80%,what is the real interest rate in November?

Q2) Jay and Joyce meet George,the banker,to work out the details of a mortgage.They all expect that inflation will be 2 percent over the term of the loan,and they agree on a nominal interest rate of 6 percent.As it turns out,the inflation rate is 5 percent over the term of the loan.

a.What was the expected real interest rate?

b.What was the actual real interest rate?

c.Who benefited and who lost because of the unexpected inflation?

Q3) Suppose the nominal interest rate this year is 6.5% and that the economy experiences 2.3% deflation.What is the real interest rate?

Q4) If the real value of an item bought ten years ago is less than it's nominal value at that time,what can one infer about the change in the overall price level during this ten year period?

Q5) In 1954,Mickey Mantle earned $21,000 playing for the New York Yankees.The CPI in 1954 was 26.9,and the CPI in 2010 was 218.06.What is Mickey Mantle's 1954 salary in 2010 dollars?

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Chapter 11: Measuring the Cost of Living: Part B

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Sample Questions

Q1) If the current year CPI is 140,then the price level has increased 40 percent since the base year.

A)True

B)False

Q2) In comparison to the situation in the late 1970s,the United States experienced lower nominal interest rates and higher real interest rates in the late 1990s.

A)True

B)False

Q3) If the nominal interest rate is 5 percent and the inflation rate is 2 percent,then the real interest rate is 7 percent.

A)True

B)False

Q4) Substitution bias occurs because the CPI ignores the possibility of consumer substitution toward goods that have become relatively less expensive.

A)True

B)False

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Chapter 12: Production and Growth

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Sample Questions

Q1) Average income in some East Asian countries,as measured by real GDP per person,has recently grown at an average annual rate that implies income will double about every

A)10 years.

B)15 years.

C)20 years.

D)25 years.

Q2) In which of the following countries did real GDP per person fall by about 13% from 2000 to 2014?

A)India

B)Singapore

C)Zimbabwe

D)None of the above are correct.

Q3) Which of the following is a good gauge of economic progress?

A)the level of real GDP per person,but not the growth rate of real GDP per person

B)the level of real GDP per person and the growth rate of real GDP per person

C)the growth rate of real GDP per person,but not the level of real GDP per person

D)neither the level nor the growth rate of real GDP per person

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Chapter 12: Production and Growth: Economic Growth

Around the World

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Sample Questions

Q1) Over the period 1900-2014,which of the following countries experienced the highest average annual growth rate of real GDP per person?

A)Brazil

B)China

C)India

D)Pakistan

Q2) In 2010,the imaginary nation of Mainland had a population of 6,000 and real GDP of 120,000.In 2011 the population was 6,200 and real GDP of 128,960.Over the year in question,real GDP per person in Mainland grew by

A)2 percent,which is high compared to average U.S.growth over the last one-hundred years.

B)2 percent,which is about the same as average U.S.growth over the last one-hundred years.

C)4 percent,which is high compared to average U.S.growth over the last one-hundred years.

D)4 percent,which is about the same as average U.S.growth over the last one-hundred years.

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Page 79

Chapter 12: Production and Growth: Productivity Its Role and Determinants

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Sample Questions

Q1) Proprietary technology is technology that is A)widely used because it is easy to learn.

B)widely used because the government subsidizes its use.

C)not widely used because people could,but have not,taken the time to learn how to apply it.

D)not widely used because it is known or controlled only by the company that discovered it.

Q2) In a market economy,we know that a resource has become scarcer when A)its price rises relative to other prices.

B)it is non-renewable and some of it is used.

C)people search for substitutes.

D)All of the above are correct.

Q3) Refer to Scenario 25-1.If the production function has the constant-returns-to-scale property,then it can be rewritten as

A)Y/L = AF(1,K/L,H/L,N/L)

B)Y/L = AF(L,1,H/L,N/L)

C)Y/L = AF(L,K/L,1,N/L)

D)Y/L = AF(L,K/L,H/L,1)

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Chapter 12: Production and Growth: Economic Growth and Public Policy

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Sample Questions

Q1) Which of the following is correct?

A)If developing countries limit career and educational opportunities for women,birth rates are likely to be lower.

B)Growth rates in developed and developing countries are nearly the same.

C)Historically,in periods where the rate of population growth was high,so was the rate of growth in world real GDP per person.

D)None of the above is correct.

Q2) Rapid population growth

A)was hailed by Thomas Robert Malthus as the key to future economic growth.

B)tends to lead to higher levels of educational attainment.

C)is the main reason that less developed nations are poor.

D)may depress economic prosperity by reducing the amount of capital which each worker has to work with.

Q3) Suppose an economy experiences an increase in its saving rate.The higher saving rate leads to a higher growth rate of productivity

A)in the short run,but not in the long run.

B)in the long run,but not in the short run.

C)in both the short run and the long run.

D)in neither the short run nor the long run.

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Chapter 12: Production and Growth: Conclusion the

Importance of Long-Run Growth

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Q1) In order to promote growth in living standards,policymakers must A)protect property rights.

B)maintain political stability.

C)encourage the accumulation of factors of production.

D)All of the above

Q2) Economists differ in their views of the role of the government in promoting economic growth.A controversial idea is that government should A)lend support to the invisible hand by maintaining property rights and political stability. B)lower barriers and impediments to free trade.

C)encourage capital formation.

D)target and subsidize specific industries important for technological progress.

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Chapter 12: Production and Growth: Part A

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Sample Questions

Q1) What is a production function? Write an equation for a typical production function,and explain what each of the terms represents.

Q2) Is physical capital a produced factor of production? Is human capital a produced factor of production?

Q3) Some data that at first might seem puzzling: The share of GDP devoted to investment was similar for the United States and South Korea from 1960-1991.However,during these same years South Korea had a 6 percent growth rate of average annual income per person,while the United States had only a 2 percent growth rate.If the saving rates were the same,why were the growth rates so different?

Q4) Explain the distinction between technological knowledge and human capital.

Q5) Susan and Calvin paint houses.Susan consistently paints about 400 square feet of a house's exterior per hour,while Calvin consistently paints about 300 square feet per hour.Susan's ---------- exceeds that of Calvin.

Q6) Compare and contrast the population theories of Malthus and Kremer.

Q7) Why is productivity related to the standard of living? In your answer be sure to explain what productivity and the standard of living mean.Make a list of things that determine labor productivity.

Q8) In what sense is capital accumulation costly to a society?

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Chapter 12: Production and Growth: Part B

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Q1) The same size decrease in the amount of capital stock per worker will cause output per worker to fall by more in a country with a relatively high level of capital per worker than in a country with a relatively low level of capital per worker.

A)True

B)False

Q2) If per capita real income grows by 2 percent per year,then it will double in approximately 20 years.

A)True

B)False

Q3) If Country A produces 7,000 units of goods and services using 700 hours of labor,and if Country B produces 5,500 units of goods and services using 500 units of labor,then productivity is lower in Country A than in Country B.

A)True

B)False

Q4) Journey Motorcycles produced 100 motorcycles using 50 workers who each worked 8 hours a day.Journey's productivity was 1/4.

A)True

B)False

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84

Chapter 13: Saving Investment and the Financial System

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Q1) Institutions that help to match one person's saving with another person's investment are collectively called the

A)Federal Reserve system.

B)banking system.

C)monetary system.

D)financial system.

Q2) Given that Monika's income exceeds her expenditures,Monika is best described as a

A)saver or as a supplier of funds.

B)saver or as a demander of funds.

C)borrower or as a supplier of funds.

D)borrower or as a demander of funds.

Q3) The primary economic function of the financial system is to

A)keep interest rates low.

B)provide expert advice to savers and investors.

C)match one person's consumption expenditures with another person's capital expenditures.

D)match one person's saving with another person's investment.

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Chapter 13: Saving Investment and the Financial System: Financial Institutions in the US economy

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Sample Questions

Q1) A bond that never matures is known as a A)perpetuity.

B)an intermediary bond.

C)an indexed bond.

D)a junk bond.

Q2) If the government's expenditures exceeded its receipts,it would likely

A)lend money to a bank or other financial intermediary.

B)borrow money from a bank or other financial intermediary.

C)buy bonds directly from the public.

D)sell bonds directly to the public.

Q3) Compared to stocks,bonds offer the holder

A)lower risk and lower potential return.

B)lower risk and higher potential return.

C)higher risk and lower potential return.

D)higher risk and higher potential return.

Q4) All else equal,when people become more optimistic about a company's future,the

A)supply of the stock and the price will both rise.

B)supply of the stock and the price will both fall.

C)demand for the stock and the price will both rise.

D)demand for the stock and the price will both fall.

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Chapter 13: Saving Investment and the Financial System:

Saving and Investment in the National Income Accounts

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Sample Questions

Q1) According to the definitions of national saving and private saving,if Y,C,and G remained the same,an increase in taxes would

A)raise both national saving and private saving.

B)raise national saving and reduce private saving.

C)leave national saving and private saving unchanged.

D)leave national saving unchanged and reduce private saving.

Q2) Which of the following would a macroeconomist consider as investment?

A)Marisa purchases a bond issued by Proctor and Gamble Corp.

B)Karlee purchases stock issued by Texas Instruments,Inc.

C)Charlie builds a new coffee shop.

D)All of the above are correct.

Q3) Refer to Scenario 26-2.Suppose,for this economy,the relationship between the real interest rate,r,and investment,I,is given by the equation I = 10.78 - 3.03r.(If,for example,r = 10,this means that the real interest rate is 10 percent. )The equilibrium real interest rate for this economy is

A)3.19 percent.

B)3.00 percent.

C)3.16 percent.

D)7.14 percent.

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Chapter 13: Saving Investment and the Financial System:

The Market for Loanable Funds

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Q1) If the government instituted an investment tax credit,then which of the following would be higher in equilibrium?

A)saving and the interest rate

B)saving but not the interest rate

C)the interest rate but not saving

D)neither saving nor the interest rate

Q2) For an imaginary economy,when the real interest rate is 5 percent,the quantity of loanable funds demanded is $1,000 and the quantity of loanable funds supplied is $1,000.Currently,the nominal interest rate is 9 percent and the inflation rate is 2 percent.Currently,

A)the market for loanable funds is in equilibrium.

B)the quantity of loanable funds supplied exceeds the quantity of loanable funds demanded,and as a result the real interest rate will rise.

C)the quantity of loanable funds supplied exceeds the quantity of loanable funds demanded,and as a result the real interest rate will fall.

D)the quantity of loanable funds demanded exceeds the quantity of loanable funds supplied,and as a result the real interest rate will rise.

Q3) What is a bond buyer promised when she buys a bond?

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Chapter 13: Saving Investment and the Financial System:

Part A

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Q1) When tax code changes reduce investment incentives, the _____ for loanable funds curve shifts to the _____. This results in a(n) _____ in the interest rate and a(n) _____ in investment.

Q2) A restaurant chain announces declining revenues. Whats the name of the type of risk that this news raises for holders of this chains bonds? What does this news to do the interest rate on this chains bonds?

Q3) Bonds issued by state and local governments are called _____ bonds. Bonds issued by financially shaky corporations are called _____ bonds. Of these two, which type of bond usually pays a relatively higher interest rate?

Q4) What variable adjusts to balance demand and supply in the market for loanable funds?

Q5) Concerns about the bankruptcy of an appliance manufacturer diminish after a new CEO is appointed and some of the company's less productive factories are sold.What type of risk for bondholders falls? What happens to the interest rate on this company's bonds?

Q6) When tax code changes increase investment incentives, the _____ for loanable funds curve shifts to the _____. This results in a(n) _____ in the interest rate and a(n) _____ in investment.

Page 89

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Chapter 13: Saving Investment and the Financial System:

Part B

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Q1) If Congress instituted an investment tax credit,the demand for loanable funds would shift rightward.

A)True

B)False

Q2) If the tax rate fell,holding municipal bonds would be less desirable so the interest rates on them would fall.

A)True

B)False

Q3) Financial markets are important for bringing equilibrium to the loanable funds market,but do not affect the efficient allocation of scarce resources in the long-run.

A)True

B)False

Q4) When the government budget deficit rises,national saving is reduced,interest rates rise,and investment falls.

A)True

B)False

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Page 90

Chapter 14: The Basic Tools of Finance

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Q1) Which of the following statements best describes the economist's view of finance and the financial system?

A)The financial system is very important to the functioning of the economy,and the tools of finance are often helpful to us as individuals when we find ourselves making certain decisions.

B)The financial system,while interesting,is not very important to the functioning of the economy;however,the tools of finance are often helpful to us as individuals when we find ourselves making certain decisions.

C)The financial system is very important to the functioning of the economy;however,the tools of finance are not particularly helpful to us as individuals since we seldom make decisions for which those tools are useful.

D)The field of finance is intimately concerned with the financial system and the tools of finance,and financial economists see great importance in them;however,the "mainstream" economist sees little value in studying financial markets or the tools of finance.

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Chapter 14: The Basic Tools of Finance: Present Value

Measuring the Time Value of Money

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Sample Questions

Q1) A car salesperson gives you four alternative ways to pay for your car.The first is to pay $18,000 today.The second is to pay $19,000 one year from today.The third is to pay $20,300 two years from today.The fourth is to pay $21,500 three years from today.If the interest rate is 6 percent,which payment option has the lowest present value and which has the highest?

A)The first is lowest;the second is highest.

B)The second is lowest;the third is highest.

C)The third is lowest;the fourth is highest.

D)The fourth is lowest;the first is highest.

Q2) Your accountant tells you that if you can continue to earn the current interest rate on your balance of $800 for the next two years you will have $898.88 in your account.If your accountant is correct,then what is the current interest rate?

A)6 percent

B)7 percent

C)8 percent

D)9 percent

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Chapter 14: The Basic Tools of Finance: Managing Risk

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Sample Questions

Q1) Kayla faces risks and she pays a fee to ABC Company;in return,ABC Company agrees to accept some or all of Kayla's risks.ABC Company is

A)a mutual fund.

B)an insurance company.

C)a diversified company.

D)an equity-financed company.

Q2) In general,as a person includes fewer stocks and more bonds in his portfolio,

A)both risk and expected return rise.

B)risk rises but expected return falls.

C)risk falls,but expected return rises.

D)both risk and expected return fall.

Q3) An increase in the number of corporations in a portfolio from 110 to 120 reduces

A)market risk by more than an increase from 1 to 10.

B)market risk by less than an increase from 1 to 10.

C)firm-specific risk by more than an increase from 1 to 10.

D)firm-specific risk by less than an increase from 1 to 10.

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93

Chapter 14: The Basic Tools of Finance: Asset Valuation

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Sample Questions

Q1) Diversification

A)increases the likely fluctuation in a portfolio's return.Thus,the likely standard deviation of the portfolio's return is higher.

B)increases the likely fluctuation in a portfolio's return.Thus,the likely standard deviation of the portfolio's return is lower.

C)reduces the likely fluctuation in a portfolio's return.Thus,the likely standard deviation of the portfolio's return is higher.

D)reduces the likely fluctuation in a portfolio's return.Thus,the likely standard deviation of the portfolio's return is lower.

Q2) Writing in the Wall Street Journal in 2009,economist Jeremy Siegel argued that,in the years leading up to the financial crisis of 2008-2009,

A)financial firms acted in too risky a fashion.

B)the Federal Reserves's efforts to rein in the risky behavior of certain financial firms were inadequate.

C)falling house prices "crashed the banks and the economy."

D)All of the above are correct.

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94

Chapter 14: The Basic Tools of Finance: Conclusion

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Sample Questions

Q1) Economists disagree as to whether

A)the stock price of a company should reflect the company's expected profitability.

B)the basic tools of finance reflect valid ideas.

C)stock prices reflect rational estimates of a company's true worth.

D)there is any relationship between stock market fluctuations and fluctuations in the economy more broadly.

Q2) Stock market fluctuations

A)often go hand in hand with fluctuations in the economy more broadly.

B)rarely have anything to do with fluctuations in the economy more broadly.

C)have few,if any,macroeconomic implications.

D)are attributable to the widespread belief that the efficient markets hypothesis is correct.

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95

Chapter 14: The Basic Tools of Finance: Part A

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Sample Questions

Q1) Should a person who is risk averse hold a portfolio with no stock and only bonds? Explain.

Q2) What is meant by an asset bubble?

Q3) A company has an investment project that will cost $2 million today and yield a payoff of $3 million in 5 years.What interest rate represents the cutoff between profitability and nonprofitability for this project?

Q4) Suppose your bank account pays a 5% interest rate.You are considering purchasing a share of stock in DH Corporation for $250.The stock will pay you a $10 dividend at the end of years 1,2,3,4,and 5.You expect to be able to sell the stock at the end of year 5 for $300.Is DH a good investment? Provide evidence to support your answer.

Q5) Until recently,shares of stock accounted for 40 percent of Jimmy's savings.A few days ago,Jimmy sold some bonds and bought some additional shares of stock.Now shares of stock account for 70 percent of Jimmy's savings.How did this change affect Jimmy's expected retun on his savings? How did it affect the risks he faces?

Q6) Your boss asks you to do fundamental analysis of a corporation.What value is she asking for and how would you estimate this value?

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Chapter 14: The Basic Tools of Finance: Part B

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Sample Questions

Q1) The concept of present value helps explain why the quantity of loanable funds demanded decreases when the interest rate increases.

A)True

B)False

Q2) In the 15 years ending February 2016,most active portfolio managers failed to beat the market.

A)True B)False

Q3) An increase in the interest rate causes a decrease in the future value of $1,000 that you have in a bank account today.

A)True

B)False

Q4) The market for insurance is one example of reducing risk by using diversification. A)True

B)False

Q5) Risk aversion simply means that people dislike bad things to happen.

A)True B)False

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Chapter 15: Unemployment

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Q1) Cyclical unemployment is closely associated with

A)long-term economic growth.

B)short-run ups and downs of the economy.

C)fluctuations in the natural rate of unemployment.

D)changes in the minimum wage.

Q2) To maintain their standard of living,most people rely on

A)government assistance.

B)their labor earnings.

C)their personal savings.

D)All of the above are correct.

Q3) The natural rate of unemployment

A)arises from a single problem that has a single solution.

B)is easy for policymakers to reduce.

C)Both a and b are correct.

D)None of the above is correct.

Q4) Cyclical unemployment refers to

A)the portion of unemployment created by job search.

B)short-run fluctuations around the natural rate of unemployment.

C)changes in unemployment due to changes in the natural rate of unemployment.

D)the portion of unemployment created by wages set above the equilibrium level.

98

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Chapter 15: Unemployment: Identifying Unemployment

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Sample Questions

Q1) The Bureau of Labor Statistics produces data on A)unemployment.

B)types of employment.

C)length of the average workweek.

D)All of the above are correct.

Q2) Since 1960,the natural rate of unemployment in the U.S.has been between

A)0% and 1%.

B)5% and 6%.

C)10% and 12%.

D)12% and 24%.

Q3) Amy is working part-time.Tavaris is on temporary layoff.Who is included in the Bureau of Labor Statistics' "employed" category?

A)only Amy

B)only Tavaris

C)both Amy and Tavaris

D)neither Amy nor Tavaris

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99

Chapter 15: Unemployment: Job Search

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Q1) Economists would predict that,other things the same,the more generous unemployment compensation a country has,the

A)shorter the duration of each spell of unemployment and the higher the unemployment rate.

B)shorter the duration of each spell of unemployment and the lower the unemployment rate.

C)longer the duration of each spell of unemployment and the higher the unemployment rate.

D)longer the duration of each spell of unemployment and the lower the unemployment rate.

Q2) Suppose that because of the popularity of the low-carb diet,bakeries need fewer workers and steak houses need more workers.The unemployment created by this change is

A)frictional unemployment created by efficiency wages.

B)frictional unemployment created by sectoral shifts.

C)structural unemployment created by efficiency wages.

D)structural unemployment created by sectoral shifts.

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Chapter 15: Unemployment: Minimum-Wage Laws

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Sample Questions

Q1) Refer to Figure 28-3.If the government imposes a minimum wage of $4,then employment will decrease by A)0 workers.

B)2,000 workers.

C)3,000 workers.

D)4,000 workers.

Q2) Refer to Figure 28-4.If the government imposes a minimum wage of $12,how many workers will be unemployed?

A)0

B)2,000

C)4,000

D)10,000

Q3) Refer to Figure 28-4.If the government imposes a minimum wage of $6,how many workers will be unemployed?

A)0

B)4,000

C)8,000

D)12,000

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Chapter 15: Unemployment: Unions and Collective Bargaining

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Sample Questions

Q1) When a union raises the wage above the equilibrium level,

A)both the quantity of labor supplied and unemployment rise.

B)both the quantity of labor supplied and unemployment fall.

C)the quantity of labor supplied rises and unemployment falls.

D)the quantity of labor supplied falls and unemployment rises.

Q2) Suppose that roofers are not unionized.If roofers unionize,then the supply of labor in other sectors of the economy will

A)decrease,raising wages in industries that are not unionized.

B)decrease,reducing wages in industries that are not unionized.

C)increase,raising wages in industries that are not unionized.

D)increase,reducing wages in industries that are not unionized.

Q3) Consider two labor markets in which jobs are equally attractive in all respects other than the wage rate.All workers are equally able to do either job.Initially,both labor markets are perfectly competitive.If a union organizes workers in one of the markets,then the wage rates will tend to

A)rise in both markets.

B)fall in both markets

C)rise for the union jobs,but remain unchanged for the nonunion jobs.

D)rise for the union jobs and fall for the nonunion jobs.

Page 102

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Chapter 15: Unemployment: The Theory of Efficiency Wages

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Q1) Efficiency wages contribute to

A)frictional unemployment and the natural rate of unemployment.

B)frictional unemployment but not the natural rate of unemployment.

C)structural unemployment and the natural rate of unemployment.

D)structural unemployment but not the natural rate of unemployment.

Q2) Buddy is the owner of a firm that bottles beer in St.Louis,Missouri.There are many other such firms in the area.Buddy decides that if he pays his workers a wage higher than the going market wage,his profits will increase.Which of the following is a likely explanation for his decision?

A)The higher the wage,the less often his workers will choose to leave his firm.

B)The higher the wage,the lower will be the costs of obtaining needed supplies.

C)The higher the wage,the more he can charge for his beer

D)The higher the wage,the more he will have to monitor his workers for shirking.

Q3) The efficiency-wage theory of worker turnover suggests that firms with higher turnover will have

A)higher production costs and higher profits.

B)higher production costs and lower profits.

C)lower production costs and higher profits.

D)lower production costs and lower profits.

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Page 103

Chapter 15: Unemployment: Part A

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Sample Questions

Q1) Provide a definition of the natural rate of unemployment.

Q2) Give an historical example of an efficiency wage that was considered by the firm to be "one of the finest cost-cutting moves we ever made."

Q3) Following the recession of 2001,there was a month in which employment and the unemployment rate both rose.Assuming the computations were correct,how is it possible for both to have increased?

Q4) An important determinant of a countrys standard of living is the amount of __________ it typically experiences.

Q5) Briefly summarize the advantages and disadvantages of unemployment insurance.

Q6) Refer to Figure 28-7.If the minimum wage increases from $100 to $125,how many additional workers will be unemployed?

Q7) Give a few examples of how sectoral shifts temporarily cause unemployment.

Q8) Define efficiency wages.

Q9) Most spells of unemployment are short,and most unemployment observed at any given time is long term.How can this be?

Q10) Define the natural rate of unemployment and cyclical unemployment.

Q11) The Internet may reduce frictional unemployment because it __________.

Q12) Briefly describe how labor unions can affect wages in non-unionized industries. Page 104

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Chapter 15: Unemployment: Part B

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Q1) Structural unemployment results when the number of jobs is insufficient for the number of workers.

A)True B)False

Q2) The Bureau of Labor Statistics computes labor-force participation rates for the entire adult population and for groups based on age,gender,and race.

A)True B)False

Q3) Even though the difference in labor-force participation rates of U.S.males and females has narrowed,the labor-force participation rate of males remains higher than that of females.

A)True

B)False

Q4) The Bureau of Labor Statistics' U-5 measure of joblessness includes marginally attached workers.

A)True B)False

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Chapter 16: The Monetary System

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Q1) The existence of money

A)reduces specialization.

B)makes trade easier.

C)allows for barter.

D)hinders production.

Q2) A double coincidence of wants

A)is required when there is no item in an economy that is widely accepted in exchange for goods and services.

B)is required in an economy that relies on barter.

C)is a hindrance to the allocation of resources when it is required for trade.

D)All of the above are correct.

Q3) You use U.S.currency to pay the owner of a restaurant for a delicious meal.The currency

A)has no intrinsic value.The exchange is an example of barter.

B)has no intrinsic value.The exchange is not an example of barter.

C)has intrinsic value.The exchange is not an example of barter.

D)has intrinsic value.The exchange is not an example of barter

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Chapter 16: The Monetary System: The Meaning of Money

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Q1) Credit cards

A)defer payments.

B)are a store of value.

C)have led to wider use of currency.

D)are part of the money supply.

Q2) Which list ranks assets from most to least liquid?

A)currency,demand deposits,money market mutual funds

B)currency,money market mutual funds,demand deposits

C)money market mutual funds,demand deposits,currency

D)demand deposits,money market mutual funds,currency

Q3) Money is the most liquid asset available because

A)it is a store of value.

B)it is a medium of exchange.

C)it is a unit of account.

D)it has intrinsic value.

Q4) Which of the following is not included in either M1 or M2?

A)U.S.Treasury bills

B)small time deposits

C)demand deposits

D)money market mutual funds

108

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Chapter 16: The Monetary System: The Federal Reserve System

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Q1) Economists call an institution designed to oversee the banking system and regulate the quantity of money in the economy

A)a central bank.

B)a charter bank.

C)a national bank.

D)a state bank.

Q2) Which of the following does the Federal Reserve not do?

A)It controls the supply of money.

B)It acts as a lender of last resort to banks.

C)It makes loans to any qualified business that requests one.

D)It tries to ensure the health of the banking system.

Q3) The Federal Reserve

A)was created in 1913.

B)is the U.S.'s central bank.

C)has other duties in addition to controlling the money supply.

D)All of the above are correct.

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Page 109

Chapter 16: The Monetary System: Banks and the Money Supply

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Q1) In a fractional-reserve banking system,a bank

A)does not make loans.

B)does not accept deposits.

C)keeps only a fraction of its deposits in reserve.

D)None of the above is correct.

Q2) If the reserve ratio is 5 percent,then $1,000 of additional reserves can create up to A)$5,500 of new money.

B)$5,000 of new money.

C)$4,000 of new money.

D)None of the above is correct.

Q3) In Ugoland,the money supply is $8 million and reserves are $1 million.Assuming that people hold only deposits and no currency,and that banks hold no excess reserves,then the reserve requirement is

A)14 percent.

B)12.5 percent.

C)8 percent.

D)None of the above is correct.

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Chapter 16: The Monetary System: The Feds Tools of Monetary Control

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Q1) To increase the money supply,the Fed could A)sell government bonds.

B)decrease the discount rate.

C)increase the reserve requirement.

D)None of the above is correct.

Q2) If the Fed raised the reserve requirement,the demand for reserves would

A)increase,so the federal funds rate would fall.

B)increase,so the federal funds rate would rise.

C)decrease,so the federal funds rate would fall.

D)decrease,so the federal funds rate would rise.

Q3) Suppose that in a country people gain more confidence in the banking system and so hold relatively less currency and more deposits.As a result,bank reserves will

A)decrease and the money supply will eventually decrease.

B)decrease and the money supply will eventually increase.

C)increase and the money supply will eventually decrease.

D)increase and the money supply will eventually increase.

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Chapter 16: The Monetary System: Part A

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Q1) The Fed ____ bonds when it conducts an open-market purchase. This action _____ the money supply.

Q2) Discuss why the Fed rarely changes the reserve requirements.

Q3) What are the functions of money?

Q4) How does the Fed Open Market Committee increase the money supply?

Q5) Which two of the Ten Principles of Economics imply that the Fed can profoundly affect the economy?

Q6) Describe the role of bank leverage in bank insolvency during times of falling asset prices.

Q7) The existence of money makes trade easier.How is it that money can also increase the standard of living?

Q8) Why is the Chairman of the Federal Reserve often referred to as the "second most powerful person in the United States?"

Q9) In many circumstances,prisoners are not allowed to possess cash.Does this mean there is no money in prison? Explain.

Q10) Money, such as gold, with some intrinsic value is called _____. Money with no intrinsic value is called _____.

Page 112

Q11) The money multiplier is _____ when the reserve ratio is 12.5 percent.

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Chapter 16: The Monetary System: Part B

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57 Verified Questions

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Sample Questions

Q1) A debit card is more similar to a credit card than to a check.

A)True

B)False

Q2) The series of bank failures in 1907 occurred despite the creation of the Federal Reserve many years earlier.

A)True

B)False

Q3) As banks create money,they create wealth.

A)True

B)False

Q4) Money is the only asset that functions as a store of value.

A)True

B)False

Q5) The Federal Reserve can alter the size of the money supply by changing reserves or changing reserve requirements.

A)True

B)False

Q6) Currently,bank runs are a major problem for the U.S.banking system and the Fed.

A)True

B)False

Page 113

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Chapter 17: Money Growth and Inflation

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22 Verified Questions

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Sample Questions

Q1) Which country is correctly matched with its 2015 inflation rate?

A)9 percent inflation in the United States.

B)3.6 percent inflation in Russia.

C)59 percent inflation in Venezuela.

D)4.9 percent inflation in India.

Q2) Which of the following is correct?

A)A period of hyperinflation is a period of extraordinarily low inflation.

B)A period of deflation is any period during which the inflation rate is decreasing.

C)In the 1970s,U.S.inflation averaged about 7.8 percent per year

D)All of the above are correct.

Q3) Which of the following statements concerning the history of U.S.inflation is not correct?

A)Prices rose at an average annual rate of about 3.6 percent over the last 80 years.

B)There was about a 17-fold increase in the price level over the last 80 years.

C)Inflation in the 1970s was below the average over the last 80 years.

D)The United States has experienced periods of deflation.

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Chapter 17: Money Growth and Inflation: The Classical

Theory of Inflation

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245 Verified Questions

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Sample Questions

Q1) During the 2008 financial crisis velocity decreased.This means that the rate at which money changed hands

A)decreased.Other things the same,a decrease in velocity decreases the price level.

B)decreased.Other things the same,a decrease in velocity increases the price level.

C)increased.Other things the same,an increase in velocity decreases the price level.

D)increased.Other things the same,an increase in velocity increases the price level.

Q2) According to the classical dichotomy,which of the following is not influenced by monetary factors?

A)the price level

B)real GDP

C)nominal interest rates

D)All of the above are correct.

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115

Chapter 17: Money Growth and Inflation: The Costs of Inflation

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Sample Questions

Q1) Suppose that in some tax year you earned a nominal interest rate of 6 percent.During the time you held these funds inflation was 1 percent.You compute that you made a real after-tax interest rate of 3 percent.What was your tax rate?

A)40 percent.

B)33.3 percent.

C)25 percent.

D)50 percent.

Q2) Given a nominal interest rate of 5 percent,in which of the following cases would you earn the highest after-tax real rate of interest?

A)Inflation is 3 percent;the tax rate is 15 percent.

B)Inflation is 2 percent;the tax rate is 40 percent.

C)Inflation is 1 percent;the tax rate is 50 percent.

D)The after-tax real interest rate is the same for all of the above.

Q3) When deciding how much to save,people care most about

A)after-tax nominal interest rates.

B)after-tax real interest rates.

C)before-tax real interest rates.

D)before-tax nominal interest rates.

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Chapter 17: Money Growth and Inflation: Conclusion

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Sample Questions

Q1) In order to maintain stable prices,a central bank must

A)maintain low interest rates.

B)keep unemployment low.

C)tightly control the money supply.

D)sell indexed bonds.

Q2) Inflation costs are minimized under which inflation rate?

A)-20 percent

B)5 percent

C)15 percent

D)575 percent

Q3) Inflation costs are minimized during periods of A)hyperinflation.

B)large,unexpected deflation.

C)moderate inflation.

D)rapid money growth.

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Chapter 17: Money Growth and Inflation: Part A

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Sample Questions

Q1) Some countries have experienced an extraordinarily high rate of inflation known as _____. This is usually due to governments using money creation as a way to pay for their spending. The revenue the government raises by creating money is called the

Q2) The idea that firms incur actual costs when they change prices is known as _____. Firms in countries with lower inflation rates will change price _____ frequently compared to those countries where inflation is higher.

Q3) What are menu costs and why does high inflation increase menu costs?

Q4) If the price level this year was 140 and was 135 last year,what was the inflation rate to the nearest decimal?

Q5) The _____ interest rate tells you how fast the number of dollars in your bank account will rise over time, and it is the sum of the _____ interest rate and the _____.

Q6) In the long run inflation is explained by _______.For countries that had hyperinflation this source of inflation arose primarily because the government

Q7) During hyperinflations, people desire to hold less money and will go to the bank more frequently. This waste of resources due to the high rate of inflation is known as

Page 118

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Chapter 17: Money Growth and Inflation: Part B

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Sample Questions

Q1) If the quantity of money demanded is greater than the quantity supplied,then the value of money rises.

A)True

B)False

Q2) U.S.prices rose at an average annual rate of about 3.6 percent over the last 80 years.

A)True

B)False

Q3) The quantity theory of money implies that if output and velocity are constant,then a 50 percent increase in the money supply would lead to less than a 50 percent increase in the price level.

A)True

B)False

Q4) If inflation is higher than expected,then lenders receive interest payments whose real values are less than they expected.

A)True

B)False

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Chapter 18: Open Economy Macroeconomics Basic Concepts

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Sample Questions

Q1) International trade

A)raises the standard of living in all trading countries.

B)lowers the standard of living in all trading countries.

C)leaves the standard of living unchanged.

D)raises the standard of living for importing countries and lowers it for exporting countries.

Q2) Which type(s)of economies interact with other economies?

A)only closed economies

B)only open economies

C)closed economies and open economies

D)neither closed nor open economies

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Page 120

Chapter 18: Open Economy Macroeconomics Basic

Concepts: The International Flows of Goods and Capital

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Sample Questions

Q1) A Finnish corporation builds a factory the produces ceiling fans in the United States.This is an example of Finish

A)foreign direct investment that increases Finnish net capital outflow.

B)foreign direct investment that decreases Finnish net capital outflow.

C)foreign portfolio investment that increases Finnish net capital outflow.

D)foreign portfolio investment that decreases Finnish net capital outflow.

Q2) When making investment decisions,investors

A)compare the real interest rates offered on different bonds.

B)compare the nominal,but not the real,interest rates offered on different bonds.

C)purchase the highest-priced bond available.

D)All of the above are correct.

Q3) During some year a country had exports of $50 billion,imports of $70 billion,and domestic investment of $100 billion.What was its saving during the year?

A)$80 billion

B)$100 billion

C)$120 billion

D)$150 billion

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Page 121

Chapter 18: Open Economy Macroeconomics Basic

Concepts: The Prices for International Transactions Real and Nominal Exchange Rates

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Sample Questions

Q1) If the nominal exchange rate e is foreign currency per dollar,the domestic price is P,and the foreign price is P*,then the real exchange rate is defined as A)P*/(Pe).

B)P/(P*e).

C)e(P*/P).

D)e(P/P*),

Q2) Suppose that the real exchange rate between the United States and Brazil is defined in terms of baskets of goods.Other things the same,which of the following will increase the real exchange rate (that is increase the number of baskets of Brazilian goods a basket of U.S.goods buys)?

A)an increase in the quantity of Brazilian currency that can be purchased with a dollar B)a decrease in the price of U.S.goods

C)an increase in the price in Brazilian currency of Brazilian goods

D)All of the above are correct.

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122

Chapter 18: Open Economy Macroeconomics Basic

Concepts: A First Theory of Exchange-Rate Determination

Purchasing-Power Parity

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Sample Questions

Q1) The price of a basket of goods is $2000 in the U.S.If purchasing-power parity holds,and the dollar buys two units of some country's currency,then how many units of foreign currency does the same basket of goods cost in that country?

A)4000

B)2000

C)1000

D)None of the above are correct.

Q2) Purchasing-power parity implies that the nominal exchange rate given as foreign currency per unit of U.S.currency must rise if the price level(s)in

A)foreign countries rise.

B)the United States rises.

C)all countries rise.

D)all countries fall.

Q3) Purchasing-power parity describes the forces that determine

A)prices in the short run.

B)prices in the long run.

C)exchange rates in the short run.

D)exchange rates in the long run.

Page 123

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Chapter 18: Open Economy Macroeconomics Basic

Concepts: Part A

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67 Verified Questions

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Sample Questions

Q1) A country had a net capital outflow of $1.5 trillion and imports of $0.5 trillion.What was the value of its exports?

Q2) While vacationing in Turkey you see a rug you consider purchasing.The seller tells you the rug costs 1,200 Turkish lire.

A.If the exchange rate is .60 lira per dollar,how many dollars does the rug cost?

B.If the dollar depreciates against the lira,will it take more or fewer dollars to buy the rug? Explain.

Q3) In the first quarter of 2015 the U.S.had a trade deficit.In the first quarter of 2016 exports fell and imports rose.According to these numbers what happened to net exports?

Q4) The Norwegian government uses $500,000 of previously obtained U.S.dollars to buy $500,000 of police cars from a U.S.company.

As a result of this exchange,by how much,if at all,and in which direction did:

A.U.S.net exports change?

B.U.S.net capital outflow change?

Q5) What does purchasing-power parity imply about the real exchange rate? Explain what this means.

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Chapter 18: Open Economy Macroeconomics Basic

Concepts: Part B

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63 Verified Questions

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Sample Questions

Q1) Other things the same,an increase in the nominal exchange rate raises the real exchange rate.

A)True

B)False

Q2) It is possible for a country to have domestic investment that exceeds national saving.

A)True

B)False

Q3) In the 1970s and 1980s the U.S.dollar depreciated against the German mark and appreciated against the Italian lira because U.S.inflation was lower than in Germany but higher than in Italy.

A)True

B)False

Q4) Net capital outflow is the purchase of domestic assets by foreign residents minus the purchase of foreign assets by domestic residents.

A)True

B)False

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Chapter 19: A Macroeconomic Theory of the Open Economy

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Sample Questions

Q1) The open-economy macroeconomic model includes

A)only the market for loanable funds.

B)only the market for foreign-currency exchange.

C)both the market for loanable funds and the market for foreign-currency exchange.

D)neither the market for loanable funds nor the market for foreign-currency exchange.

Q2) Over the past three decades,the United States has

A)generally had,or been very near to a trade balance.

B)had trade deficits in about as many years as it has trade surpluses.

C)persistently had a trade deficit.

D)persistently had a trade surplus.

Q3) The open-economy macroeconomic model examines the determination of

A)the output growth rate and the real interest rate.

B)unemployment and the exchange rate.

C)the output growth rate and the inflation rate.

D)the trade balance and the exchange rate.

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126

Chapter 19: A Macroeconomic Theory of the Open

Economy: Supply and Demand for Loanable Funds and for

Foreign-Currency Exchange

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141 Verified Questions

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Sample Questions

Q1) An increase in the real interest rate in the United States changes the quantity of loanable funds demanded because

A)U.S.residents will want to buy more foreign assets.

B)Foreign residents will want to buy more U.S.goods and services.

C)U.S.firms will want to purchase fewer U.S.capital goods.

D)All of the above are correct.

Q2) At the equilibrium real interest rate in the open-economy macroeconomic model,the amount that people want to save equals the desired quantity of

A)net capital outflow.

B)domestic investment.

C)net capital outflow plus domestic investment.

D)foreign currency supplied.

Q3) A country has national saving of $90 billion,government expenditures of $30 billion,domestic investment of $50 billion,and net capital outflow of $40 billion.What is its demand for loanable funds?

A)$40 billion

B)$60 billion

C)$90 billion

D)$130 billion

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Chapter 19: A Macroeconomic Theory of the Open

Economy: Equilibrium in the Open Economy

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Sample Questions

Q1) When the U.S.real interest rate falls,purchasing U.S.assets becomes

A)more attractive to both U.S.and foreign residents.

B)more attractive to U.S.residents and less attractive to foreign residents.

C)less attractive to U.S.residents and more attractive to foreign residents.

D)less attractive to both U.S.residents and foreign residents.

Q2) When the U.S.real interest rate falls

A)U.S.purchases of foreign assets and foreign purchases of U.S.assets rise

B)U.S.purchases of foreign assets rise and foreign purchases of U.S.assets fall

C)U.S.purchases of foreign assets fall and foreign purchases of U.S.assets rise

D)U.S.purchases of foreign assets and foreign purchases of U.S.assets fall

Q3) If the exchange rate falls,U.S.residents pay

A)more dollars for foreign bonds and get more dollars from interest payments.

B)more dollars for foreign bonds but get fewer dollars from interest payments.

C)fewer dollars for foreign bonds and also get fewer dollars from interest payments.

D)fewer dollars for foreign bonds but get more dollars from interest payments.

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Page 128

Chapter 19: A Macroeconomic Theory of the Open

Economy: How Policies and Events Affect an Open Economy

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Sample Questions

Q1) Which of the following would cause the real exchange rate of the U.S.dollar to appreciate?

A)the U.S.government budget deficit decreases

B)capital flight from the U.S.

C)the U.S.imposes import quotas

D)None of the above is correct.

Q2) When Mexico suffered from capital flight in 1994,the U.S.real interest rate

A)rose and the real exchange rate of the dollar appreciated.

B)rose and the real exchange rate of the dollar depreciated.

C)fell and the real exchange rate of the dollar appreciated.

D)fell and the real exchange rate of the dollar depreciated.

Q3) Refer to Figure 32-5.Starting from 3% and .75,an increase in the government budget surplus can be illustrated as a move to

A)4% and 1

B)4% and .5

C)2% and 1

D)2% and .5

Page 129

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Chapter 19: A Macroeconomic Theory of the Open

Economy: Part A

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Sample Questions

Q1) If for some reason U.S.residents increase their purchases of foreign assets,then all else constant which curve in the market for foreign-currency exchange shifts and which direction does it shift? What happens to the exchange rate?

Q2) What is the source of the demand for loanable funds in the open-economy macroeconomic model ?

Q3) If the exchange rate rises, domestic goods become relatively ______ expensive. This change in the affordability of domestic goods makes domestic goods _____ attractive to foreigners. So, _______ ______.

Q4) If there is a shortage in the market for foreign-currency exchange,what happens to the exchange rate and to net exports?

Q5) What is the source of the supply of dollars in the market for foreign-currency exchange?

Q6) Suppose that U.S.savers decide that holding Brazilian assets has become riskier.What happens to U.S.net capital outflow? What happens to the U.S.real interest rate?

Q7) What are the sources of the demand for loanable funds? What happens to the quantity of loanable funds demanded when the interest rate rises?

Q8) Define net capital outflow.

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Chapter 19: A Macroeconomic Theory of the Open

Economy: Part B

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Sample Questions

Q1) Capital flight shifts the NCO curve to the left.

A)True

B)False

Q2) When the government budget deficit increases,national saving decreases.

A)True

B)False

Q3) In the open-economy macroeconomic model,a higher domestic interest rate reduces the quantity of loanable funds demanded

A)True

B)False

Q4) Other things the same,when a Canadian company imports bicycles from the U.S. ,the open-economy macroeconomic model treats this transaction as part of the demand for dollars in the U.S.foreign-currency exchange market.

A)True

B)False

Q5) If the real interest rate were above the equilibrium rate,there would be a shortage of loanable funds.

A)True

B)False

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Chapter 20: Aggregate Demand and Aggregate Supply

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Sample Questions

Q1) A relatively mild period of falling incomes and rising unemployment is called a(n)

A)depression.

B)recession.

C)expansion.

D)business cycle.

Q2) During recessions

A)workers are laid off.

B)factories are idle.

C)firms may find they are unable to sell all they produce.

D)All of the above are correct.

Q3) On average,over the last 50 years,real GDP has grown by about

A)3 percent per year.

B)2 percent per year.

C)1 percent per year.

D)4 percent per year.

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Chapter

Three Key Facts About Economic Fluctuations

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Sample Questions

Q1) Which part of real GDP fluctuates most over the course of the business cycle?

A)consumption expenditures

B)government expenditures

C)investment expenditures

D)net exports

Q2) Which of the following typically rises during a recession?

A)investment.

B)unemployment.

C)tax revenues.

D)new home construction.

Q3) Historically,as recessions have ended the unemployment rate declined

A)gradually to near zero.

B)rapidly to near zero.

C)gradually to a rate of about 5%-6%.

D)rapidly to a rate of about 5%-6%.

Q4) During recessions

A)sales and profits fall.

B)sales and profits rise.

C)sales rise,profits fall.

D)profits fall,sales rise.

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Explaining Short-Run Economic Fluctuations

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Sample Questions

Q1) According to classical macroeconomic theory,changes in the money supply affect

A)unemployment and the price level.

B)unemployment but not the price level.

C)the price level,but not unemployment.

D)neither the price level nor unemployment.

Q2) Which of the following would not be included in aggregate demand?

A)an increase in firms' inventories.

B)purchases of goods by households.

C)firms' purchases of newly produced machinery.

D)government's tax collections.

Q3) According to classical macroeconomic theory,changes in the money supply affect

A)real GDP and the price level.

B)real GDP but not the price level.

C)the price level,but not real GDP.

D)neither the price level nor real GDP.

Q4) The model of short-run economic fluctuations focuses on

A)the price level and real GDP.

B)productivity and economic growth.

C)the neutrality of money and inflation.

D)None of the above is correct.

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Chapter 20: Aggregate Demand and Aggregate Supply:

The Aggregate-Demand Curve

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Sample Questions

Q1) Other things the same,when the price level falls,interest rates

A)rise,which means consumers will want to spend more on homebuilding.

B)rise,which means consumers will want to spend less on homebuilding.

C)fall,which means consumers will want to spend more on homebuilding.

D)fall,which means consumers will want to spend less on homebuilding.

Q2) Other things the same,as the price level rises,the real value of a dollar

A)rises,and interest rates rise.

B)rises,and interest rates fall.

C)falls,and interest rates rise.

D)falls,and interest rates fall.

Q3) Aggregate demand shifts right if

A)government purchases increase and shifts left if stock prices rise.

B)government purchases increase and shifts left if stock prices fall.

C)government purchases decrease and shifts left if stock prices rise.

D)government purchases decrease and shifts left is stock prices fall.

Q4) Tax cuts shift aggregate demand

A)right as do increases in government spending.

B)right while increases in government spending shift aggregate demand left.

C)left as do increases in government spending.

D)left while increases in government spending shift aggregate demand right.

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Chapter 20: Aggregate Demand and Aggregate Supply:

The Aggregate-Supply Curve

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Sample Questions

Q1) The aggregate supply curve is upward sloping in

A)the short and long run.

B)neither the short nor long run.

C)the long run,but not the short run.

D)the short run,but not the long run.

Q2) Which of the following is not a determinant of the long-run level of real GDP?

A)the price level.

B)the amount of capital used by firms.

C)available stock of human capital.

D)available technology

Q3) Which of the following shifts long-run aggregate supply right?

A)an increase in either technology or the human capital stock.

B)an increase in human capital but not technology.

C)an increase in technology,but not the human capital stock.

D)neither an increase in technology nor the human capital stock.

Q4) Which of the following would shift long-run aggregate supply to the right?

A)increased immigration from abroad

B)a decrease in the price of an imported natural resource

C)opening the economy to international trade

D)All of the above are correct.

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Chapter 20: Aggregate Demand and Aggregate Supply:

Two Causes of Economic Fluctuations

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Sample Questions

Q1) During World War II,the economy's production increased about

A)25 percent and prices rose about 5 percent.

B)50 percent and prices rose about 10 percent.

C)75 percent and prices rose about 15 percent.

D)100 percent and prices rose about 20 percent.

Q2) Which of the following is a lesson concerning shifts in aggregate demand?

A)they contribute to fluctuations in output.

B)in the long-run they change real output,but not the price level.

C)policymakers are unable to mitigate the severity of economic fluctuations.

D)All of the above are correct.

Q3) If aggregate demand shifts left,then in the short run

A)the price level and real GDP both rise.

B)the price level rises and real GDP falls.

C)the price level falls and real GDP rises.

D)the price and real GDP both fall.

Q4) If the government repeals an investment tax credit and increases income taxes,

A)real GDP rises,and the price level could rise,fall,or stay the same.

B)real GDP falls,and the price level could rise,fall,or stay the same.

C)real GDP and the price level rise.

D)real GDP and the price level fall.

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Chapter 20: Aggregate Demand and Aggregate Supply:

Part A

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Q1) What do most economists believe concerning the relation between the price level and real output?

Q2) Using the aggregate demand and aggregate supply model,an increase in what curve is by itself consistent with the changes in prices and output that occurred during World War II?

Q3) Other things the same,what happens in the long run to the price level and quantity of output after a contraction in aggregate demand?

Q4) Explain how a recession differs from a depression.

Q5) The sticky-price theory helps explain what feature of the aggregate demand and aggregate supply model?

Q6) Make a list of things that would shift the aggregate demand curve to the right.

Q7) What curve shows the quantity of goods and services that households,firms,the government,and customers abroad want to buy at each price level?

Q8) Misperceptions theory helps explain what feature of the aggregate demand and aggregate supply model?

Page 138

Q9) Refer to Figure 33-13.Identify the price and output levels consistent with long-run equilibrium.

Q10) During periods of stagflation,what happens to output and prices in the economy?

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Chapter 20: Aggregate Demand and Aggregate Supply:

Part B

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Q1) During World War II government expenditures increased almost five-fold and output almost doubled.

A)True

B)False

Q2) Most macroeconomic variables that measure some type of income,spending,or production fluctuate closely together.

A)True

B)False

Q3) According to classical macroeconomic theory,changes in the money supply change nominal but not real variables.

A)True

B)False

Q4) If aggregate demand shifts right,then eventually price level expectations rise.This increase in price level expectations causes the aggregate demand curve to shift to the left back to its original position.

A)True

B)False

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Chapter 21: The Influences of Monetary and Fiscal Policy on Aggregate Demand

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Q1) The Federal Open Market Committee is

A)the group at the Federal Reserve that sets monetary policy.

B)in charge of tax collection.

C)the group that sets the amount of government spending.

D)the group that reviews income assistance programs.

Q2) Shifts in aggregate demand affect the price level in

A)the short run but not in the long run.

B)the long run but not in the short run.

C)both the short and long run.

D)neither the short nor long run.

Q3) Shifts in the aggregate-demand curve can cause fluctuations in

A)neither the level of output nor the level of prices.

B)the level of output,but not in the level of prices.

C)the level of prices,but not in the level of output.

D)the level of output and in the level of prices.

Q4) Fiscal policy affects the economy

A)only in the short run.

B)only in the long run.

C)in both the short and long run.

D)in neither the short nor the long run.

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Chapter 21: The Influences of Monetary and Fiscal Policy on

Aggregate Demand: How Monetary Policy Influences

Aggregate Demand

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Q1) The theory of liquidity preference assumes that the nominal supply of money is determined by the

A)level of real output only.

B)interest rate only.

C)level of real output and by the interest rate.

D)Federal Reserve.

Q2) According to the theory of liquidity preference,if the interest rate rises

A)people want to hold more money.This response is shown by moving to the right along the money demand curve.

B)people want to hold more money.This response is shown by shifting the money demand curve right.

C)people want to hold less money.This response is shown by moving to the left along the money demand curve.

D)people want to hold less money.This response is shown by shifting the money demand curve left.

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Chapter 21: The Influences of Monetary and Fiscal Policy on

Aggregate Demand: How Fiscal Policy Influences

Aggregate Demand

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Q1) If the marginal propensity to consume is 0.75,and there is no investment accelerator or crowding out,a $15 billion increase in government expenditures would shift the aggregate demand curve right by

A)$60 billion,but the effect would be larger if there were an investment accelerator.

B)$60 billion,but the effect would be smaller if there were an investment accelerator.

C)$45 billion,but the effect would be larger if there were an investment accelerator.

D)$45 billion,but the effect would be smaller if there were an investment accelerator.

Q2) If the MPC = 4/5,then the government purchases multiplier is A)5/4.

B)4/5.

C)5.

D)20.

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143

Chapter 21: The Influences of Monetary and Fiscal Policy on

Aggregate Demand: Using Policy to Stabilize the Economy

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Q1) Suppose stock prices rise.To offset the resulting change in output the Federal Reserve could

A)increase the money supply.This increase would also move the price level closer to its value before the rise in stock prices.

B)increase the money supply.However,this increase would move the price level farther from its value before the rise in stock prices.

C)decrease the money supply.This decrease would also move the price level closer to its value before the rise in stock prices.

D)decrease the money supply.However,this decrease would move the price level farther from its value before the rise in stock prices.

Q2) The lag problem associated with monetary policy is due mostly to

A)the fact that business firms make investment plans far in advance.

B)the political system of checks and balances that slows down the process of determining monetary policy.

C)the time it takes for changes in government spending to affect the interest rate.

D)All of the above are correct.

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Page 144

Chapter 21: The Influences of Monetary and Fiscal Policy on

Aggregate Demand: Part A

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Q1) What is the value of the multiplier if the marginal propensity to consume is 0.5?

Q2) A decrease in taxes ---- aggregate demand through larger ----- by households.

Q3) An open-market purchase by the Federal Reserve creates an excess ----- of money.This causes interest rates to ----- and investment to -----.The change in investment causes aggregate demand to shift to the -----.

Q4) Refer to Figure 34-11.The economy is currently at point A.To stabilize output,the president and Congress can reduce ----- and/or increase -----.

Q5) Suppose that the government increases expenditures by $150 billion while increasing taxes by $150 billion.Suppose that the MPC is .80 and that there are no crowding out or accelerator effects.What is the combined effects of these changes? Why is the combined change not equal to zero?

Q6) If the Federal Reserve's goal is to stabilize aggregate demand,then it will ----- the money supply in response to a stock market boom.This causes interest rates to -----.

Q7) Explain why the interest rate is the opportunity cost of holding currency.What is the benefit of holding currency?

Q8) An increase in taxes shifts the aggregate ----- curve to the -----.

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Chapter 21: The Influences of Monetary and Fiscal Policy on

Aggregate Demand: Part B

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Q1) The interest-rate effect is partially explained by the fact that a higher price level reduces money demand.

A)True

B)False

Q2) If the MPC is 4/5,the multiplier is 5/4.

A)True

B)False

Q3) An implication of the Employment Act of 1946 is that the government should respond to changes in the private economy to stabilize aggregate demand.

A)True

B)False

Q4) In liquidity preference theory,an increase in the interest rate,other things the same,decreases the quantity of money demanded,but does not shift the money demand curve.

A)True

B)False

Q5) During recessions,the government tends to run a budget deficit.

A)True

B)False

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Chapter 22: The Short Run Trade Off Between Inflation and Unemployment

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Q1) One determinant of the natural rate of unemployment is the A)rate of growth of the money supply.

B)minimum wage rate.

C)expected inflation rate.

D)All of the above are correct.

Q2) One determinant of the long-run average unemployment rate is the A)market power of unions,while the inflation rate depends primarily upon government spending.

B)minimum wage,while the inflation rate depends primarily upon the money supply growth rate.

C)rate of growth of the money supply,while the inflation rate depends primarily upon the market power of unions.

D)existence of efficiency wages,while the inflation rate depends primarily upon the extent to which firms are competitive.

Q3) The misery index is calculated as the A)inflation rate plus the unemployment rate.

B)unemployment rate minus the inflation rate.

C)actual inflation rate minus the expected inflation rate.

D)natural unemployment rate times the inflation rate

Page 147

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Chapter 22: The Short Run Trade Off Between Inflation and Unemployment:

The Phillips Curve

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Q1) Refer to Figure 35-3.What is measured along the vertical axis of the right-hand graph?

A)the interest rate

B)the inflation rate

C)the government's budget deficit as a percent of GDP

D)the growth rate of the nominal money supply

Q2) A.W.Phillips' findings were based on data

A)from 1861-1957 for the United Kingdom.

B)from 1861-1957 for the United States.

C)mostly from the post-World War II period in the United Kingdom.

D)mostly from the post-World War II period in the United States.

Q3) In 2001,Congress and President Bush instituted tax cuts.According to the short-run Phillips curve,in the short run this change should have

A)reduced inflation and unemployment.

B)raised inflation and unemployment.

C)reduce inflation and raised unemployment.

D)raised inflation and reduced unemployment.

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Page 148

Chapter 22: The Short Run Trade Off Between Inflation and

Shifts in the Phillips Curve the Role of Expectations

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Sample Questions

Q1) More flexible labor markets will shift

A)both the long-run Phillips curve and the long-run aggregate supply curve to the right.

B)both the long-run Phillips curve and the long-run aggregate supply curve to the left.

C)the long-run Phillips curve to the right and the long-run aggregate supply curve to the left.

D)the long-run Phillips curve to the left and the long-run aggregate supply curve to the right.

Q2) The equation,

Unemployment rate = Natural rate of unemployment - a × ( ctual inflation - Expected inflation),

A)is the equation of the short-run Phillips curve.

B)implies there can be no stable short-run Phillips curve.

C)reflects the reasoning of Friedman and Phelps.

D)All of the above are correct.

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Chapter 22: The Short Run Trade Off Between Inflation and

Unemployment: Shifts in the Phillips Curve the Role of Supply Shocks

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Q1) If there is an adverse supply shock,then

A)unemployment rises and the short-run Phillips curve shifts right.

B)unemployment rises and the short-run Phillips curve shifts left.

C)unemployment falls and the short-run Phillips curve shifts right.

D)unemployment falls and the short-run Phillips curve shifts left.

Q2) An adverse supply shock will cause output

A)and prices to rise.

B)and prices to fall.

C)to rise and prices to fall.

D)to fall and prices to rise.

Q3) Which of the following would cause the price level to rise and output to fall in the short run?

A)an increase in the money supply

B)a decrease in the money supply

C)an adverse supply shock

D)a favorable supply shock

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Chapter 22: The Short Run Trade Off Between Inflation and Unemployment:

The Cost of Reducing Inflation

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Sample Questions

Q1) Disinflation would eventually cause

A)the short-run and the long run Phillips curve to shift right.

B)the short-run and the long run Phillips curve to shift left.

C)the short-run Phillips curve but not the long run Phillips curve to shift right.

D)the short-run Phillips curve but not the long run Phillips curve to shift left.

Q2) If the sacrifice ratio is 2,reducing the inflation rate from 4 percent to 2 percent would

A)cost 1 percent of annual output.

B)cost 4 percent of annual output.

C)imply that unemployment would rise by 1%.

D)imply that unemployment would rise by 4%.

Q3) Between 1993 and 2001 the U.S.economy experienced

A)relatively low inflation and unemployment rates.

B)relatively high inflation and unemployment rates.

C)relatively low inflation rates and relatively high unemployment rates.

D)relatively high inflation rates and relatively low unemployment rates.

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Chapter 22: The Short Run Trade Off Between Inflation and Unemployment:

Part A

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Sample Questions

Q1) According to the Phillips curve diagram, if a central bank disinflates what ultimately happens to the unemployment rate?

Q2) Suppose that a central bank reduces the money supply growth rate to disinflate. What does disinflation mean? If people do not alter their inflation expectations, what happens to output and unemployment?

Q3) Government expenditures increase.What happens to the price level and output? Explain how the change in the price level and output effect the inflation rate and the unemployment rate.

Q4) If the Fed responded to an adverse supply shock by increasing the growth rate of the money supply and maintained the higher growth rate, what would eventually happen to the short-run Phillips curve? Why?

Q5) For a given short-run Phillips curve,if expected inflation is 10% but actual inflation is 8%,is the unemployment rate above or below its natural rate?

Q6) If there is a favorable supply shock which direction does the short-run Phillips curve shift? What initially happens to unemployment and inflation as a result of this shock?

Q7) What is meant by the natural rate of unemployment?

Q8) What does the natural-rate hypothesis claim?

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Chapter 22: The Short Run Trade Off Between Inflation and Unemployment:

Part B

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Q1) Samuelson and Solow believed that the Phillips curve offered policymakers a menu of possible economic outcomes.

A)True

B)False

Q2) An increase in inflation expectations shifts the short-run Phillips curve right and has no effect on the long-run Phillips curve.

A)True

B)False

Q3) In the long run,the inflation rate depends primarily on the growth rate of the money supply.

A)True

B)False

Q4) If the Fed reduces inflation by 2 percentage points and this results in a 6 percentage-point increase in unemployment,then the sacrifice ratio is equal to 3.

A)True

B)False

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Page 153

Chapter 23: Six Debates Over Macroeconomic Policy:

Should Monetary and Fiscal Policymakers Try to Stabilize the Economy

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Sample Questions

Q1) If the unemployment rate rises,which policies would be appropriate to reduce it?

A)increase the money supply,increase taxes

B)increase the money supply,cut taxes

C)decrease the money supply,increase taxes

D)decrease the money supply,cut taxes

Q2) If the unemployment rate falls below its long-run level,which policies would be appropriate to stabilize output?

A)increase the money supply,increase taxes

B)increase the money supply,cut taxes

C)decrease the money supply,increase taxes

D)decrease the money supply,cut taxes

Q3) "Leaning against the wind" is exemplified by a(n)

A)tax increase when there is a recession.

B)increase in the money supply when there is a recession.

C)decrease in government expenditures when there is a recession.

D)All of the above are correct.

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Chapter 23: Six Debates Over Macroeconomic Policy:

Should the Government Fight Recessions With Spending

Hikes Rather Than Tax Cuts

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Q1) Which of the following is correct?

A)Well designed tax cuts can increase investment which fluctuates more than consumption over the business cycle.

B)Well designed tax cuts can increase investment but it fluctuates less than consumption over the business cycle.

C)Tax cuts have little effect on investment which fluctuate more than consumption over the business cycle.

D)Tax cuts have little effect on investment but it fluctuates less than consumption over the business cycle

Q2) Which of the following is correct? Investment tax credits

A)can increase investment,but stimulating investment is not a key to ending a recession.

B)can increase investment,which is a key to ending a recession.

C)can not increase spending on investment goods,but stimulating investment is not a key to ending a recession.

D)can not increase spending on investment goods,but stimulating investment is a key to ending a recession.

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Chapter 23: Six Debates Over Macroeconomic Policy:

Should Monetary Policy Be Made by Rule Rather Than by Discretion

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Q1) A law that requires the money supply to grow by a fixed percentage each year would eliminate

A)the time inconsistency problem,but not political business cycles.

B)the political business cycle,but not the time inconsistency problem.

C)both the time inconsistency problem and political business cycles.

D)neither the time inconsistency problem nor political business cycles.

Q2) If a government managed to reduce the time inconsistency problem by mandating that the central bank target inflation at a low rate,then

A)the long-run Phillips curve would shift right.

B)the long-run Phillips curve would shift left.

C)the short-run Phillips curve would shift up.

D)the short-run Phillips curve would shift down.

Q3) A 1977 amendment to the Federal Reserve Act of 1913 says the Fed should "promote" which of the following goals?

A)only price stability

B)only maximum employment

C)only price stability and maximum employment

Page 156

D)price stability,maximum employment,and moderate long-term interest rates

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Chapter 23: Six Debates Over Macroeconomic Policy:

Should the Central Bank Aim for Zero Inflation

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Sample Questions

Q1) When wages are set by contract,inflation

A)reduces real wages;this likely makes labor markets more flexible.

B)reduces real wages;this likely makes labor markets less flexible.

C)raises real wages;this likely makes labor markets more flexible.

D)raises real wages;this likely makes labor markets less flexible.

Q2) Which of the following could the government do to decrease the costs of inflation without lowering the inflation rate?

A)Avoid unexpected changes in the inflation rate.

B)Rewrite the tax laws so that nominal gains were taxed instead of real gains.

C)Make policy that would discourage firms from issuing indexed bonds.

D)All of the above are correct.

Q3) Which costs of inflation could the government reduce without reducing inflation?

A)shoeleather and menu costs

B)menu costs and relative price variability

C)unintended changes in tax liabilities and arbitrary redistributions of wealth

D)none of the above is correct.

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Chapter 23: Six Debates Over Macroeconomic Policy:

Should the Government Balance Its Budget

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Q1) Suppose that a country has an inflation rate of about 2 percent per year and a real GDP growth rate of about 2.5 percent per year.Then the government can have a deficit of about

A)5 percent of GDP without raising the debt-to-income ratio.

B)4.5 percent of GDP without raising the debt-to-income ratio.

C)1.25 percent of GDP without raising the debt-to-income ratio.

D).5 percent of GDP without raising the debt-to-income ratio.

Q2) Which of the following is not correct?

A)Deficits give people the opportunity to consume at the expense of their children,but deficits do not require them to do so.

B)Deficits and surpluses could be used to avoid fluctuations in the tax rate.

C)The only times deficits have increased have been during times of war or economic downturns.

D)Reducing the budget deficit rather than funding more education spending could,all things considered,make future generations worse off.

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Page 158

Chapter 23: Six Debates Over Macroeconomic Policy:

Should the Tax Laws Be Reformed to Encourage Saving

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Q1) Suppose the tax rate on interest income from saving were reduced.

A)The income effect,but not the substitution effect,would tend to reduce private saving.

B)The substitution effect,but not the income effect,would tend to reduce private saving.

C)Both the income and substitution effect would tend to reduce private saving.

D)Neither the income nor the substitution effect would tend to reduce private saving.

Q2) Opponents of tax reforms intended to raise saving argue that such reforms

A)favor those with high income,and that saving may not rise because of the substitution effect.

B)favor those with high income,and that saving may not rise because of the income effect.

C)favor those with low income,and that saving may not rise because of the substitution effect.

D)favor those with low income,and that saving may not rise because of the income effect.

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Chapter 23: Six Debates Over Macroeconomic Policy:

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Q1) The six debates over macroeconomic policy exist mostly because A)economists disagree over basic issues such as the importance of saving for economic growth.

B)there are tradeoffs and people disagree about the best way to deal with them.

C)politicians offer misleading information.

D)people fail to clearly see the benefits or the costs of most changes.

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Chapter 23: Six Debates Over Macroeconomic Policy: Part

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Q1) Why might tax cuts be more appropriate than increasing government expenditures to counter recessions? Is there any evidence for this thinking?

Q2) Explain how a higher rate of return on saving could,at least in theory,lead to lower saving.

Q3) Explain how it is possible for the government debt to grow forever.

Q4) Explain the time inconsistency of monetary policy.

Q5) Explain how tax cuts can increase aggregate supply.

Q6) Suppose tax policies are changed to encourage saving.Explain how the income effect and substitution effect influence the amount saved.

Q7) If net exports fall,what actions could a central bank take to stabilize the economy?

Q8) Explain why fiscal policy actions typically work with a lag.

Q9) Are there any situations in which running a budget deficit is justified? Explain.

Q10) Why is there a lag between the Fed's actions and the economy's response?

Page 161

Q11) According to a 1977 amendment to the Federal Reserve Act of 1913,what weights should the Fed put on the goals of maximum employment,stable prices,and moderate long-term interest rates?

Q12) Explain what is meant by saying that capital income is taxed twice.

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Chapter 23: Six Debates Over Macroeconomic Policy: Part

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Sample Questions

Q1) The cost of inflation reduction is a large,permanent increase in unemployment.

A)True

B)False

Q2) There are ways that policymakers could reduce the costs of inflation without reducing inflation.

A)True

B)False

Q3) The laws that created the Fed give it only vague recommendations about what goals it should pursue,and they do not tell the Fed how to pursue whatever goals it might choose.

A)True

B)False

Q4) In essence,a consumption tax puts all saving into tax-advantaged savings accounts.

A)True

B)False

Q5) A reduction in the marginal tax-rate includes an income effect that tends to increase savings.

A)True

B)False

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Q1) State and local governments generate revenue from all of the following sources except

A)sales taxes.

B)the federal government.

C)corporate income taxes.

D)customs duties.

Q2) Which of the following countries has lower total government tax revenue as a percentage of GDP than the United States?

A)Canada

B)Germany

C)Sweden

D)Mexico

Q3) The two taxes that together provide the U.S.federal government with almost 80 percent of its revenue are

A)individual income taxes and property taxes.

B)individual income taxes and corporate income taxes.

C)individual income taxes and payroll taxes.

D)sales taxes and payroll taxes.

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